<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PHYSICIAN PARTNERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
DELAWARE 6719 93-1217068
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
111 SW COLUMBIA STREET, SUITE 725
PORTLAND, OREGON 97201
(503) 224-2249
(Address, including ZIP Code, and telephone number, including
area code, of registrant's principal executive offices)
MR. DAVID GOLDBERG
111 SW COLUMBIA STREET, SUITE 725
PORTLAND, OREGON 97201
(503) 224-2249
(Name, address, including ZIP Code, and telephone number of agent for service)
COPIES TO:
DOUGLAS M. MANCINO, ESQ.
MARK J. MIHANOVIC, ESQ.
MCDERMOTT, WILL & EMERY
2049 CENTURY PARK EAST, SUITE 3400
LOS ANGELES, CALIFORNIA 90067
(310) 277-4110
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement is declared effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Class A Common Stock, par value $.01 per
share..................................... 6,500,250 shares(1) $1.60(2) $10,387,976(2) $3,147.87(3)
</TABLE>
(1) The amount of Class A Common Stock, par value $.01 per share, of Physician
Partners, Inc. ("PPI") to be registered hereby is comprised of the maximum
number of shares of such Class A Common Stock issuable upon consummation of
the merger of HealthFirst Medical Group, P.C. ("HealthFirst"), The Corvallis
Clinic, P.C. ("Corvallis Clinic") and Medford Clinic, P.C. ("Medford") with
and into PPI (the "Merger").
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(f)(2) of the Securities Act of 1933, as amended (the
"Securities Act"), based upon the book value of the securities to be
cancelled in the Merger, calculated as the aggregate of the $5,046,528 book
value of such securities of HealthFirst (as reflected on the HealthFirst
June 30, 1996 balance sheet), the $2,022,077 book value of such securities
of Corvallis Clinic (as reflected on the Corvallis Clinic June 30, 1996
balance sheet) and the $3,319,371 book value of such securities of Medford
Clinic (as reflected on the Medford Clinic June 30, 1996 balance sheet). The
proposed maximum offering price per share is based on the proposed maximum
aggregate offering price divided by the number of shares to be registered.
(3) The registration fee of $3,147.87 has been calculated pursuant to Rule
457(f)(2) as follows: 1/33 of one percent of the aggregate book value, as of
June 30, 1996, of the securities to be cancelled in the Merger.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
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<PAGE>
PHYSICIAN PARTNERS, INC.
CROSS-REFERENCE SHEET FOR REGISTRATION STATEMENT ON FORM S-4
AND JOINT PROXY STATEMENT/PROSPECTUS
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FORM S-4 ITEM NUMBER AND CAPTION CAPTION IN JOINT PROXY STATEMENT/PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
A. Information about the Transaction
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus........................... Facing Page of Registration Statement; Cross-
Reference Sheet; Cover Page of Joint Proxy
Statement/Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Available Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information.................................. Facing Page of Registration Statement; Summary; Risk
Factors
4. Terms of the Transaction............................. Available Information; Summary; The Merger and
Related Transactions; Terms of the Reorganization
and Merger; Operation, Management and Business of
PPI Following the Merger; Experts; Legal Matters
5. Pro Forma Financial Information...................... Summary; Unaudited Pro Forma Financial Statements of
PPI, Including Notes Thereto
6. Material Contacts with the Company Being Acquired.... Terms of the Reorganization and Merger
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to Be Underwriters...... Not Applicable
8. Interests of Named Experts and Counsel............... Terms of the Reorganization and Merger; Experts;
Legal Matters
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not Applicable
B. Information about the Registrant
10. Information With Respect to S-3 Registrants.......... Not Applicable
11. Incorporation of Certain Information by Reference.... Not Applicable
12. Information With Respect to S-2 or S-3 Registrants... Not Applicable
13. Incorporation of Certain Information by Reference.... Not Applicable
14. Information With Respect to Registrants Other Than
S-3 or S-2 Registrants............................. Summary; Operation, Management and Business of PPI
Following the Merger; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Unaudited Pro Forma Financial
Statements of PPI, Including Notes Thereto;
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER AND CAPTION CAPTION IN JOINT PROXY STATEMENT/PROSPECTUS
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<C> <S> <C>
C. Information About the Companies Being Acquired
15. Information With Respect to S-3 Companies............ Not Applicable
16. Information With Respect to S-2 or S-3 Companies..... Not Applicable
17. Information With Respect to Companies Other Than S-2
or S-3 Companies................................... Summary; Business of HealthFirst; Description of
Capital Stock of HealthFirst; Selected Financial
Data of HealthFirst; HealthFirst Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business of Corvallis
Clinic; Description of Capital Stock of Corvallis
Clinic; Selected Financial Data of Corvallis
Clinic; Corvallis Clinic Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Business of Medford Clinic; Description
of Capital Stock of Medford Clinic; Selected
Financial Data of Medford Clinic; Medford Clinic
Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Information if Proxies, Consents or Authorizations
Are to be Solicited................................ Summary; The HealthFirst Shareholder Meeting; The
Corvallis Clinic Shareholder Meeting; The Medford
Clinic Shareholder Meeting; Terms of the
Reorganization and Merger; Operation, Management
and Business of PPI Following the Merger;
Description of Capital Stock of HealthFirst;
Description of Capital Stock of Corvallis Clinic;
Description of Capital Stock of Medford Clinic;
Proposal No. 3: Approval of the PPI Incentive
Compensation Plans Proposal; Legal Matters
19. Information if Proxies, Consents or Authorizations
Are Not to be Solicited, or in an Exchange Offer... Not Applicable
</TABLE>
<PAGE>
[LETTERHEAD OF HEALTHFIRST MEDICAL GROUP, P.C.]
IMPORTANT SHAREHOLDER COMMUNICATION
November , 1996
Dear Shareholder:
You are cordially invited and encouraged to attend the special meeting (the
"Special Meeting") of shareholders of HealthFirst Medical Group, P.C., an Oregon
professional corporation ("HealthFirst"), to be held on Wednesday, December 18,
1996, at Lloyd Center, Red Lion Hotel, 1000 NE Multnomah Ave., Portland, Oregon
97232, commencing at 6:30 p.m. (Pacific Standard Time). At the Special Meeting,
shareholders of HealthFirst will consider and make a fundamental determination
regarding the future direction of HealthFirst.
REORGANIZATION AND MERGER
More specifically, at the Special Meeting, shareholders will be asked to
consider and vote upon three proposals (the "Proposals") in connection with the
Amended and Restated Agreement and Plan of Reorganization and Merger, dated as
of September 19, 1996, as amended on November 4, 1996 (referred to herein, as so
amended, as the "Reorganization and Merger Agreement"), among HealthFirst, The
Corvallis Clinic, P.C., an Oregon professional corporation ("Corvallis Clinic"),
Medford Clinic, P.C., an Oregon professional corporation ("Medford Clinic" and,
together with HealthFirst and Corvallis Clinic, referred to herein,
collectively, as the "Companies"), and Physician Partners, Inc., a newly-formed
Delaware corporation ("PPI").
The Reorganization and Merger Agreement contemplates that each Company will
effect a reorganization of its corporate structure and a merger with and into
PPI, resulting in a consolidation of the operations (other than the provider
professional services businesses) of the Companies. Upon consummation of the
transactions contemplated by the Reorganization and Merger Agreement, each
shareholder of HealthFirst will be a stockholder of PPI as well as a shareholder
of a newly-formed Oregon professional corporation ("HealthFirst New PC"), and
PPI and HealthFirst New PC will be parties to a 40-year practice management
agreement (the "Management Agreement"). It is a condition to the consummation of
the transactions contemplated by the Reorganization and Merger Agreement that
the holders of a majority of the outstanding Class A Shares of HealthFirst vote
in person or by proxy at the Special Meeting FOR the approval thereof.
The first two Proposals arising under the Reorganization and Merger
Agreement seek the approval, respectively, of (1) the distribution by
HealthFirst to its shareholders of the entire equity interest in HealthFirst New
PC, a newly-formed Oregon professional corporation and a subsidiary of
HealthFirst, to which the provider professional services business of HealthFirst
will be transferred, and (2) the merger (the "Merger") of HealthFirst,
reorganized to hold the physician practice management business, Corvallis Clinic
and Medford Clinic (each of which would be similarly reorganized) with and into
PPI.
The transfer of the provider professional services business is necessary to
comply with Oregon law restrictions on non-physician ownership or control of a
medical practice. Shareholders of HealthFirst at the time of such reorganization
and Merger would hold, after consummation thereof, common stock of both
HealthFirst New PC and PPI. The number of shares of common stock of PPI which
shareholders of HealthFirst will receive in the Merger is based on an exchange
ratio described in the accompanying Joint Proxy Statement/Prospectus. For
details of the number of shares of common stock of PPI allocated to the
shareholders of each Company based on the number of full-time- equivalent
physicians and other specified providers of such Company, see "Summary -- The
Merger" of such accompanying Joint Proxy Statement/ Prospectus.
The shares of common stock of PPI to be received by each shareholder of
HealthFirst as consideration in the Merger will be subject to repurchase by PPI,
at its option, at a price equal to (a) the fair market value of such shares at
the time of such repurchase, in the event such shareholder ceases (for reasons
other than death, disability or retirement) to be an employee or member of the
board of directors of (i) PPI or
<PAGE>
(ii) any professional corporation with which PPI has entered into a Management
Agreement, or (b) the lesser of (i) the fair market value of such shares at the
time of issuance thereof to such shareholder or (ii) the fair market value of
such shares at the time of such repurchase, in either case in the event such
shareholder undertakes activities which are competitive with PPI or physician
groups with which PPI has entered into a Management Agreement.
MANAGEMENT AGREEMENT
In connection with the reorganization of HealthFirst, the Management
Agreement will be entered into between HealthFirst and HealthFirst New PC. Upon
consummation of the Merger, PPI would succeed to HealthFirst's rights and
obligations under the Management Agreement and would provide to HealthFirst New
PC management and administrative services and facilities and equipment. As
consideration, PPI would be entitled to (a) reimbursement of all Manager's
Expenses (as such term is hereinafter defined) incurred by PPI and (b) a
management fee equal to 16% of the "Distributable Profit Amount" (defined as (i)
gross revenues, booked on an accrual basis and subtracting specified contractual
allowances and bad debt, received by PPI or HealthFirst New PC relating to
services provided by HealthFirst New PC less (ii) Manager's Expenses).
HealthFirst New PC will be responsible for provider compensation and benefits.
HealthFirst New PC will be the entity responsible for the practice of medicine.
The term "Manager's Expenses" is defined in the Management Agreement to mean the
actual cost of all operating and non-operating expenses incurred by PPI in the
operation of HealthFirst New PC's medical offices. Any allocation of costs (as
opposed to a pass-through of actual direct costs incurred by PPI in connection
with the operation of HealthFirst New PC medical offices, for which PPI shall be
reimbursed in full) by PPI to HealthFirst New PC shall require approval of the
joint management board (composed of PPI and HealthFirst New PC representatives)
of the proposed cost allocation for a defined period of time prior to
implementation of the function for which a cost allocation is proposed.
"Manager's Expenses" expressly will not include any corporate overhead charges
of PPI (other than as expressly agreed to in the Management Agreement), federal
or state income taxes of PPI or HealthFirst New PC, any expenses which are
expressly designated as obligations to be assumed solely by PPI, and any
amortization expense resulting from the amortization of costs in connection with
the execution of the Management Agreement.
The Management Agreement will also provide for a Joint Management Board to
govern and monitor the contractual relationship (including budgetary matters)
between PPI and HealthFirst New PC. In addition, it will require HealthFirst New
PC to make payments to PPI in the event that certain HealthFirst New PC
providers engage in competition against HealthFirst New PC. It is anticipated
that each provider who is employed or promoted by HealthFirst New PC subsequent
to September 17, 1996 will enter into an employment agreement containing a
noncompetition covenant requiring such provider to, in effect, indemnify
HealthFirst New PC in the event HealthFirst New PC becomes obligated to make any
such payments under the Management Agreement to PPI as a result of such
provider's competitive activities.
The terms and conditions of the Reorganization and Merger Agreement and
related documentation are described in the accompanying Joint Proxy
Statement/Prospectus. The complete text of the Reorganization and Merger
Agreement is attached as Appendix A to the accompanying Joint Proxy Statement/
Prospectus.
STOCK OPTION PLAN
The third Proposal to be considered and voted upon by HealthFirst
shareholders at the Special Meeting seeks approval of various PPI incentive
compensation plans, copies of which are attached as Appendices B, C, D and E to
the accompanying Joint Proxy Statement/Prospectus.
Each of the Proposals to be considered and voted upon at the Special Meeting
is described in greater detail in the accompanying Joint Proxy
Statement/Prospectus.
2
<PAGE>
PURPOSE OF TRANSACTIONS
The Board of Directors of HealthFirst believes that each of Corvallis Clinic
and Medford Clinic has proven its ability to manage its business and quality of
care and, thus, are good merger partners. Such Board of Directors also believes
that PPI (a) would have a base of geography, shareholders and equity that would
result in an enhanced ability to obtain capital and (b) should also be able to
realize cost savings. Furthermore, PPI would have an enhanced capacity to
provide a high quality of clinical care and to compete economically in both
managed care and fee-for-service markets.
RECOMMENDATION OF THE BOARD OF DIRECTORS
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF HEALTHFIRST HAS
UNANIMOUSLY APPROVED THE REORGANIZATION AND MERGER AGREEMENT AND THE PROPOSALS
AND RECOMMENDS THAT YOU VOTE IN FAVOR THEREOF AT THE SPECIAL MEETING. Each of
the directors and executive officers of HealthFirst has indicated that it is his
or her present intention to vote all of the shares held thereby FOR approval of
the Proposals. The HealthFirst management has also indicated its present
intention to support approval of the Proposals.
------------------------
VOTING PROCEDURES
The affirmative vote of a majority of the outstanding Class A Shares of
HealthFirst is necessary for approval of the Proposals. It is important that
your Class A Shares be voted at the Special Meeting, regardless of the number of
such shares held by you. FAILURE OF A SHAREHOLDER TO SUBMIT A PROXY OR VOTE AT
THE SPECIAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE APPROVAL OF
THE PROPOSALS. THEREFORE, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, NO LATER THAN DECEMBER 18, 1996. A return envelope is enclosed for your
convenience and requires no postage for mailing in the United States. When a
proxy is properly executed and returned, Class A Shares of HealthFirst will be
voted in accordance with the directions indicated on the proxy, or if no
directions are indicated, such shares will be voted FOR each of the HealthFirst
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal.
This will not prevent you from voting such shares in person in the event
that you attend the Special Meeting. Any HealthFirst shareholder giving a proxy
may revoke his or her proxy at any time before it is voted at the Special
Meeting by (i) providing written notice of such revocation to HealthFirst, (ii)
signing and delivering a proxy bearing a later date, to Vern R. Williams, M.D.,
Secretary, HealthFirst Medical Group, P.C., 10535 NE Glisan, Portland, Oregon
97220 or (iii) attending the Special Meeting and voting in person.
We look forward to seeing you on Wednesday, December 18, 1996.
Sincerely,
--------------------------------------
Matthew M. Shelley, M.D.
President
3
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 18, 1996
To the Shareholders of HealthFirst Medical Group, P.C.:
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of the
shareholders of HealthFirst Medical Group, P.C., an Oregon professional
corporation ("HealthFirst"), will be held on Wednesday, December 18, 1996, at
Lloyd Center, Red Lion Hotel, 1000 NE Multnomah Ave., Portland, Oregon 97232,
commencing at 6:30 p.m. (Pacific Standard Time), for the following purposes:
1. To consider and vote upon a proposal to approve the following
constituting the HealthFirst Reorganization Proposal:
(a) the HealthFirst Asset Transfer (as such term is defined below);
(b) the HealthFirst Conversion (as such term is defined below) and other
transactions contemplated by the HealthFirst Reorganization
Transactions (as such term is defined below); and
(c) the provisions of the Amended and Restated Agreement and Plan of
Reorganization and Merger, dated as of September 19, 1996, as amended
on November 4, 1996 (referred to herein, as so amended, as the
"Reorganization and Merger Agreement"), among HealthFirst, The
Corvallis Clinic, P.C., an Oregon professional corporation
("Corvallis Clinic"), Medford Clinic, P.C., an Oregon professional
corporation ("Medford Clinic"), and Physician Partners, Inc., a
newly-formed Delaware corporation ("PPI"), relating to the
HealthFirst Reorganization Transactions.
Pursuant to the Reorganization and Merger Agreement, HealthFirst will effect
the following transactions (referred to herein, collectively, as the
"HealthFirst Reorganization Transactions"):
(i) HealthFirst will incorporate, as a wholly-owned subsidiary
thereof, a professional corporation ("HealthFirst New PC") under
the Oregon Professional Corporation Act;
(ii) HealthFirst will transfer to HealthFirst New PC certain of
HealthFirst's assets relating to the provider professional
services business of HealthFirst, which assets are expected to be
intangible assets related to the practice of medicine, including
employment agreements with providers, medical records and
insurance contracts (referred to herein, collectively, as the
"HealthFirst New PC Assets"), and cause HealthFirst New PC to
assume liabilities of HealthFirst relating to the HealthFirst New
PC Assets ("HealthFirst Asset Transfer");
(iii) HealthFirst will make a distribution under which the
shareholders of HealthFirst will receive all of the issued and
outstanding shares of capital stock of HealthFirst New PC,
allocated on a pro rata basis in accordance with the fair market
value of each such shareholder's then-current equity interest in
HealthFirst (such distribution being referred to herein as the
"HealthFirst Distribution");
(iv) HealthFirst will convert from an Oregon professional corporation
to an Oregon business corporation (such conversion being referred
to herein as the "HealthFirst Conversion") by filing Restated
Articles of Incorporation, together with the required fee, with
the Secretary of State of the State of Oregon in accordance with
the Oregon Professional Corporation Act and the Oregon Business
Corporation Act (the Oregon Business Corporation Act and the
Oregon Professional Corporation Act are referred to herein,
collectively, as the "Oregon Law"); and
(v) HealthFirst will enter into a 40-year practice management
agreement with HealthFirst New PC.
<PAGE>
2. To consider and vote upon a proposal to approve the following
constituting the Merger Proposal:
(a) the Merger (as such term is defined below); and
(b) the provisions of the Reorganization and Merger Agreement relating to
the Merger Transactions (as such term is defined below).
Pursuant to the Reorganization and Merger Agreement, the Companies will
effect the following transactions (referred to herein, collectively, as the
"Merger Transactions"):
(i) HealthFirst, Corvallis Clinic and Medford Clinic (each being, at
such time, a newly-converted Oregon business corporation) will
merge with and into PPI (the "Merger"), which Merger will occur
as promptly as practicable after the consummation of similar
reorganization transactions by Corvallis Clinic and Medford
Clinic as described in the Reorganization and Merger Agreement;
(ii) each outstanding Class A Share of HealthFirst, other than the
shares held by those shareholders who take required actions to
properly assert their dissenters' rights under the Oregon
Business Corporation Act, will be converted into the right to
receive 308 shares of Class A Common Stock, par value $0.01 per
share ("PPI Class A Common Stock"), of PPI (the term "par value"
denotes a stated value of capital stock, determined somewhat
arbitrarily and generally bearing no relation to the market or
actual value of such capital stock);
(iii) each outstanding share of Class A Preferred Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 1,454 shares of PPI Class A Common Stock;
(iv) each outstanding share of Class B Common Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 163 shares of PPI Class A Common Stock;
(v) each outstanding share of Class C Preferred Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 6 shares of PPI Class A Common Stock;
(vi) each outstanding share of Common Stock of Medford Clinic, other
than the shares held by those shareholders who take required
actions to properly assert their dissenters' rights under the
Oregon Business Corporation Act, will be converted into the right
to receive 27,474 shares of PPI Class A Common Stock; and
(vii) each outstanding option to purchase Series 1 of Class A Shares
of HealthFirst, Class B Common Stock of Corvallis Clinic and
Common Stock of Medford Clinic will be converted into the right
to acquire, on the same terms and conditions, shares of PPI Class
A Common Stock with the number of shares and exercise price
applicable to such option adjusted based on the applicable
exchange ratio for the underlying Class A Shares of HealthFirst,
Class B Common Stock of Corvallis Clinic or Common Stock of
Medford Clinic, as the case may be.
The complete text of the Reorganization and Merger Agreement is attached as
Appendix A to the accompanying Joint Proxy Statement/Prospectus. For details of
the number of shares of PPI Class A Common Stock allocated to the shareholders
of each Company based on the number of full-time-
2
<PAGE>
equivalent physicians and other specified providers of such Company, see
"Summary -- The Merger" of such accompanying Joint Proxy Statement/Prospectus.
3. To consider and vote upon a proposal to approve four plans (referred to
collectively herein as the "PPI Incentive Compensation Plans"):
(i) the Physician Partners, Inc. Employee Stock Option Plan;
(ii) the Physician Partners, Inc. Non-Employee Director Stock Option
Plan;
(iii) the Physician Partners, Inc. Non-Employee Provider Stock Option
Plan; and
(iv) the Physician Partners, Inc. Change in Control Plan,
under which, collectively a total of up to 2,500,000 shares of PPI Class A
Common Stock will be available for issuance to
(A) providers employed by HealthFirst New PC or any other
newly-formed professional corporation with which PPI enters
into a practice management agreement;
(B) officers and employees of PPI or any of its operating
subsidiaries; and
(C) non-employee members of the Board of Directors of PPI.
Copies of the PPI Incentive Compensation Plans are attached as Appendices B,
C, D and E to the accompanying Joint Proxy Statement/Prospectus.
4. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Only shareholders of record at the close of business on November 8, 1996,
will be entitled to notice of and to vote at the Special Meeting or any
adjournment thereof.
The terms and conditions of the Reorganization and Merger Agreement are
described in the accompanying Joint Proxy Statement/Prospectus.
------------------------
YOUR VOTE IS IMPORTANT. The affirmative vote of a majority of the
outstanding Class A Shares of HealthFirst is necessary for approval of the
proposals described herein at the Special Meeting. THEREFORE, PLEASE COMPLETE,
SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING, NO LATER THAN DECEMBER 18, 1996. A return
envelope is enclosed for your convenience and requires no postage for mailing in
the United States. Proxies are revocable at any time prior to the time they are
voted, and shareholders who are present at the Special Meeting may withdraw
their proxies and vote in person if they so desire.
When a proxy is properly executed and returned, Class A Shares of
HealthFirst will be voted in accordance with the directions indicated on the
proxy, or if no directions are indicated, such shares will be voted FOR each of
the HealthFirst Reorganization Proposal, the Merger Proposal and the PPI
Incentive Compensation Plans Proposal. Additional terms and conditions of the
proxy are described in the accompanying Joint Proxy Statement/Prospectus.
By order of the Board of Directors
--------------------------------------
Vern R. Williams, M.D., Secretary
November , 1996
3
<PAGE>
[LETTERHEAD OF THE CORVALLIS CLINIC, P.C.]
IMPORTANT SHAREHOLDER COMMUNICATION
November , 1996
Dear Shareholder:
You are cordially invited and encouraged to attend the special meeting (the
"Special Meeting") of shareholders of The Corvallis Clinic, P.C., an Oregon
professional corporation ("Corvallis Clinic"), to be held on Thursday, December
19, 1996, at 3680 NW Samaritan Drive, Corvallis, Oregon 97330, commencing at
6:30 p.m. (Pacific Standard Time). At the Special Meeting, shareholders of
Corvallis Clinic will consider and make a fundamental determination regarding
the future direction of Corvallis Clinic.
REORGANIZATION AND MERGER
More specifically, at the Special Meeting, shareholders will be asked to
consider and vote upon three proposals (the "Proposals") in connection with the
Amended and Restated Agreement and Plan of Reorganization and Merger, dated as
of September 19, 1996, as amended on November 4, 1996 (referred to herein, as so
amended, as the "Reorganization and Merger Agreement"), among Corvallis Clinic,
HealthFirst Medical Group, P.C., an Oregon professional corporation
("HealthFirst"), Medford Clinic, P.C., an Oregon professional corporation
("Medford Clinic" and, together with Corvallis Clinic and HealthFirst, referred
to herein, collectively, as the "Companies"), and Physician Partners, Inc., a
newly-formed Delaware corporation ("PPI").
The Reorganization and Merger Agreement contemplates that each Company will
effect a reorganization of its corporate structure and a merger with and into
PPI, resulting in a consolidation of the operations (other than the provider
professional services businesses) of the Companies. Upon consummation of the
transactions contemplated by the Reorganization and Merger Agreement, each
shareholder of Corvallis Clinic will be a stockholder of PPI as well as a
shareholder of a newly-formed Oregon professional corporation ("Corvallis Clinic
New PC"), and PPI and Corvallis Clinic New PC will be parties to a 40-year
practice management agreement (the "Management Agreement"). It is a condition to
the consummation of the transactions contemplated by the Reorganization and
Merger Agreement that the holders of two-thirds of the outstanding shares of
Class A Preferred Stock of Corvallis Clinic and the holders of two-thirds of the
outstanding shares of Class B Common Stock of Corvallis Clinic, in each case
voting separately as a group, vote in person or by proxy at the Special Meeting
FOR the approval thereof.
The first two proposals arising under the Reorganization and Merger
Agreement seek the approval, respectively, of (1) the distribution (the
"Corvallis Clinic Distribution") by Corvallis Clinic to its shareholders of the
entire equity interest in Corvallis Clinic New PC, a newly-formed Oregon
professional corporation subsidiary of Corvallis Clinic, to which the provider
professional services business of Corvallis Clinic will be transferred, and (2)
the merger (the "Merger") of Corvallis Clinic, reorganized to hold the physician
practice management business, HealthFirst and Medford Clinic (each of which
would be similarly reorganized) with and into PPI.
It is anticipated that the Corvallis Clinic Distribution will be made on a
one-to-one basis whereby each shareholder will receive the same number of shares
with the same designation of class of shares owned thereby in Corvallis Clinic.
Thus, holders of Class A Preferred Stock of Corvallis Clinic, holders of Class B
Common Stock of Corvallis Clinic and holders of Class C Preferred Stock of
Corvallis Clinic will receive the same number of shares of Class A Preferred
Stock of Corvallis Clinic New PC, Class B Common Stock of Corvallis Clinic New
PC and Class C Preferred Stock of Corvallis Clinic New PC, respectively, with
the same voting rights (though of limited application in the case of Class B
Common Stock given that the membership interest in HealthCare Partners, LLC will
be held by PPI rather than Corvallis Clinic New PC) and the same liquidation
preference applicable to the current shareholders of Corvallis Clinic.
The transfer of the provider professional services business to Corvallis
Clinic New PC and the subsequent Corvallis Clinic Distribution is necessary to
comply with Oregon law restrictions on non-
<PAGE>
physician ownership or control of a medical practice. Shareholders of Corvallis
Clinic at the time of such reorganization and Merger would hold, after
consummation thereof, capital stock of both Corvallis Clinic New PC and PPI. The
number of shares of common stock of PPI which shareholders of Corvallis Clinic
will receive in the Merger is based on an exchange ratio described in the
accompanying Joint Proxy Statement/Prospectus. For details of the number of
shares of common stock of PPI allocated to the shareholders of each Company
based on the number of full-time-equivalent physicians and other specified
providers of such Company, see "Summary--The Merger" of such accompanying Joint
Proxy Statement/ Prospectus.
The shares of common stock of PPI to be received by each shareholder of
Corvallis Clinic as consideration in the Merger will be subject to repurchase by
PPI, at its option, at a price equal to (a) the fair market value of such shares
at the time of such repurchase, in the event such shareholder ceases (for
reasons other than death, disability or retirement) to be an employee or member
of the board of directors of (i) PPI or (ii) any professional corporation with
which PPI has entered into a Management Agreement, or (b) the lesser of (i) the
fair market value of such shares at the time of issuance thereof to such
shareholder or (ii) the fair market value of such shares at the time of such
repurchase, in either case in the event such shareholder undertakes activities
which are competitive with PPI or physician groups with which PPI has entered
into a Management Agreement.
MANAGEMENT AGREEMENT
In connection with the reorganization of Corvallis Clinic, the Management
Agreement will be entered into between Corvallis Clinic and Corvallis Clinic New
PC. Upon consummation of the Merger, PPI would succeed to Corvallis Clinic's
rights and obligations under the Management Agreement and would provide to
Corvallis Clinic New PC management and administrative services and facilities
and equipment. As consideration, PPI would be entitled to (a) reimbursement of
all Manager's Expenses (as such term is hereinafter defined) incurred by PPI and
(b) a management fee equal to 16% of the "Distributable Profit Amount" (defined
as (i) gross revenues, booked on an accrual basis and subtracting specified
contractual allowances and bad debt, received by PPI or Corvallis Clinic New PC
relating to services provided by Corvallis Clinic New PC less (ii) Manager's
Expenses). Corvallis Clinic New PC will be responsible for provider compensation
and benefits. Corvallis Clinic New PC will be the entity responsible for the
practice of medicine. The term "Manager's Expenses" is defined in the Management
Agreement to mean the actual cost of all operating and non-operating expenses
incurred by PPI in the operation of Corvallis Clinic New PC's medical offices.
Any allocation of costs (as opposed to a pass-through of actual direct costs
incurred by PPI in connection with the operation of Corvallis Clinic New PC
medical offices, for which PPI shall be reimbursed in full) by PPI to Corvallis
Clinic New PC shall require approval of the joint management board (composed of
PPI and Corvallis Clinic New PC representatives) of the proposed cost allocation
for a defined period of time prior to implementation of the function for which a
cost allocation is proposed. "Manager's Expenses" expressly will not include any
corporate overhead charges of PPI (other than as expressly agreed to in the
Management Agreement), federal or state income taxes of PPI or Corvallis Clinic
New PC, any expenses which are expressly designated as obligations to be assumed
solely by PPI, and any amortization expense resulting from the amortization of
costs in connection with the execution of the Management Agreement.
The Management Agreement will also provide for a Joint Management Board to
govern and monitor the contractual relationship (including budgetary matters)
between PPI and Corvallis Clinic New PC. In addition, it will require Corvallis
Clinic New PC to make payments to PPI in the event that certain Corvallis Clinic
New PC providers engage in competition against Corvallis Clinic New PC. It is
anticipated that each provider who is employed or promoted by Corvallis Clinic
New PC subsequent to September 17, 1996 will enter into an employment agreement
containing a noncompetition covenant requiring such provider to, in effect,
indemnify Corvallis Clinic New PC in the event Corvallis Clinic New PC becomes
2
<PAGE>
obligated to make any such payment under the Management Agreement to PPI as a
result of such provider's competitive activities.
The terms and conditions of the Reorganization and Merger Agreement and
related documentation are described in the accompanying Joint Proxy
Statement/Prospectus. The complete text of the Reorganization and Merger
Agreement is attached as Appendix A to the accompanying Joint Proxy Statement/
Prospectus.
STOCK OPTION PLAN
The third Proposal to be considered and voted upon by Corvallis Clinic
shareholders at the Special Meeting seeks approval of various PPI incentive
compensation plans, copies of which are attached as Appendices B, C, D and E to
the accompanying Joint Proxy Statement/Prospectus.
Each of the Proposals to be considered and voted upon at the Special Meeting
is described in greater detail in the accompanying Joint Proxy
Statement/Prospectus.
PURPOSE OF TRANSACTIONS
The Board of Directors of Corvallis Clinic believes that in order to
maintain competitiveness in the health care industry and to continue to fund the
growth of Corvallis Clinic, the ability to raise capital is critical for the
future of Corvallis Clinic and that the proposed business combination with
HealthFirst and Medford Clinic would enable the combined entity to have a
significantly better chance of raising capital than that of Corvallis Clinic
alone. The Board of Directors of Corvallis Clinic also believes that each of
HealthFirst and Medford Clinic has proven its ability to manage its business and
quality of care and, thus, are good merger partners. Furthermore, with a greater
base of physicians and extensive geographical presence, the combined entity
would have an enhanced capacity to provide a high quality of clinical care and
to compete economically in both managed care and fee-for-service markets.
RECOMMENDATION OF THE BOARD OF DIRECTORS
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF CORVALLIS CLINIC HAS
UNANIMOUSLY APPROVED THE REORGANIZATION AND MERGER AGREEMENT AND THE PROPOSALS
AND RECOMMENDS THAT YOU VOTE IN FAVOR THEREOF AT THE SPECIAL MEETING. Each of
the directors and executive officers of Corvallis Clinic has indicated that it
is his or her present intention to vote all of the shares held thereby FOR
approval of the Proposals. The Corvallis Clinic management has also indicated
its present intention to support approval of the Proposals.
------------------------
VOTING PROCEDURES
The affirmative vote of two-thirds of the outstanding shares of Class A
Preferred Stock of Corvallis Clinic and two-thirds of the outstanding shares of
Class B Common Stock of Corvallis Clinic, in each case as a voting group, is
necessary for approval of the Proposals. It is important that your shares of
Class A Preferred Stock of Corvallis Clinic and Class B Common Stock of
Corvallis Clinic be voted at the Special Meeting, regardless of the number of
such shares held by you. FAILURE OF A SHAREHOLDER TO SUBMIT A PROXY OR VOTE AT
THE SPECIAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE APPROVAL OF
THE PROPOSALS. THEREFORE, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, NO LATER THAN DECEMBER 19, 1996.
A return envelope is enclosed for your convenience and requires no postage
for mailing in the United States. When a proxy is properly executed and
returned, shares of Class A Preferred Stock of Corvallis Clinic and Class B
Common Stock of Corvallis Clinic will be voted in accordance with the directions
3
<PAGE>
indicated on the proxy, or if no directions are indicated, such shares will be
voted FOR each of the Corvallis Clinic Reorganization Proposal, the Merger
Proposal and the PPI Incentive Compensation Plans Proposal.
This will not prevent you from voting such shares in person in the event
that you attend the Special Meeting. Any Corvallis Clinic shareholder giving a
proxy may revoke his or her proxy at any time before it is voted at the Special
Meeting by (i) providing written notice of such revocation to Corvallis Clinic,
(ii) signing and delivering a proxy bearing a later date, to Darrel D. Bibler,
M.D. Secretary, The Corvallis Clinic, P.C., 444 NW Elks Drive, Corvallis, Oregon
97330 or (iii) attending the Special Meeting and voting in person.
We look forward to seeing you on Thursday, December 19, 1996.
Sincerely,
--------------------------------------
David H. Cutsforth, Jr., M.D.
President
4
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THE CORVALLIS CLINIC, P.C.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 19, 1996
To the Shareholders of The Corvallis Clinic, P.C.:
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of the
shareholders of The Corvallis Clinic, P.C., an Oregon professional corporation
("Corvallis Clinic"), will be held on December 19, 1996, at 3680 NW Samaritan
Drive, Corvallis, Oregon 97330, commencing at 6:30 p.m. (Pacific Standard Time),
for the following purposes:
1. To consider and vote upon a proposal to approve the following
constituting the Corvallis Clinic Reorganization Proposal:
(a) the Corvallis Clinic Asset Transfer (as such term is defined below);
(b) the Corvallis Clinic Conversion (as such term is defined below) and
other transactions contemplated by the Corvallis Clinic
Reorganization Transactions (as such term is defined below); and
(c) the provisions of the Amended and Restated Agreement and Plan of
Reorganization and Merger, dated as of September 19, 1996, as amended
on November 4, 1996 (referred to herein, as so amended, as the
"Reorganization and Merger Agreement"), among Corvallis Clinic,
HealthFirst Medical Group, P.C., an Oregon professional corporation
("HealthFirst"), Medford Clinic, P.C., an Oregon professional
corporation ("Medford Clinic"), and Physician Partners, Inc., a
newly-formed Delaware corporation ("PPI"), relating to the Corvallis
Clinic Reorganization Transactions.
Pursuant to the Reorganization and Merger Agreement, Corvallis Clinic will
effect the following transactions (referred to herein, collectively, as the
"Corvallis Clinic Reorganization Transactions"):
(i) Corvallis Clinic will incorporate, as a wholly-owned subsidiary
thereof, a professional corporation ("Corvallis Clinic New PC")
under the Oregon Professional Corporation Act;
(ii) Corvallis Clinic will transfer to Corvallis Clinic New PC
certain of Corvallis Clinic's assets relating to the provider
professional services business of Corvallis Clinic, which assets
are expected to be intangible assets related to the practice of
medicine, including employment agreements with providers, medical
records and insurance contracts (referred to herein,
collectively, as the "Corvallis Clinic New PC Assets"), and cause
Corvallis Clinic New PC to assume liabilities of Corvallis Clinic
relating to the Corvallis Clinic New PC Assets ("Corvallis Clinic
Asset Transfer");
(iii) it is anticipated that Corvallis Clinic will make a
distribution under which the shareholders of Corvallis Clinic
will receive all of the issued and outstanding shares of capital
stock of Corvallis Clinic New PC (such distribution being
referred to herein as the "Corvallis Clinic Distribution") on a
one-to-one basis whereby each shareholder will receive the same
number of shares with the same designation of class of shares
owned thereby in Corvallis Clinic, so long as such distribution
would not cause adverse tax or other consequences for HealthFirst
or Medford Clinic or their respective shareholders with respect
to the qualification of the Merger (as such term is defined
below) as a "reorganization" within the meaning of Section
368(a)(i)(A) of the Internal Revenue Code, as amended (the
"Code");
(iv) Corvallis Clinic will convert from an Oregon professional
corporation to an Oregon business corporation (such conversion
being referred to herein as the "Corvallis Clinic Conversion") by
filing Restated Articles of Incorporation, together with the
required fee, with the Secretary of State of the State of Oregon
in accordance with the Oregon Professional Corporation Act and
the Oregon Business Corporation Act (collectively, the "Oregon
Law"); and
<PAGE>
(v) Corvallis Clinic will enter into a 40-year practice management
agreement with Corvallis Clinic New PC.
2. To consider and vote upon a proposal to approve the following
constituting the Merger Proposal:
(a) the Merger (as such term is defined below); and
(b) the provisions of the Reorganization and Merger Agreement relating to
the Merger Transactions (as such term is defined below).
Pursuant to the Reorganization and Merger Agreement, the Companies will
effect the following transactions (referred to herein, collectively, as the
"Merger Transactions"):
(i) Corvallis Clinic, HealthFirst and Medford Clinic (each being, at
such time, a newly-converted Oregon business corporation) will
merge with and into PPI (the "Merger"), which Merger will occur
as promptly as practicable after the consummation of similar
reorganization transactions by each of HealthFirst and Medford
Clinic as described in the Reorganization and Merger Agreement;
(ii) each outstanding share of Class A Preferred Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 1,454 shares of Class A Common Stock, par
value $0.01 per share ("PPI Class A Common Stock"), of PPI (the
term "par value" denotes a stated value of capital stock,
determined somewhat arbitrarily and generally bearing no relation
to the market or actual value of such capital stock);
(iii) each outstanding share of Class B Common Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 163 shares of PPI Class A Common Stock;
(iv) each outstanding share of Class C Preferred Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 6 shares of PPI Class A Common Stock;
(v) each outstanding Class A Share of HealthFirst, other than the
shares held by those shareholders who take required actions to
properly assert their dissenters' rights under the Oregon
Business Corporation Act, will be converted into the right to
receive 308 shares of PPI Class A Common Stock;
(vi) each outstanding share of Common Stock of Medford Clinic, other
than the shares held by those shareholders who take required
actions to properly assert their dissenters' rights under the
Oregon Business Corporation Act, will be converted into the right
to receive 27,424 shares of PPI Class A Common Stock; and
(vii) each outstanding option to purchase Class B Common Stock of
Corvallis Clinic, Series 1 of Class A Shares of HealthFirst and
Common Stock of Medford Clinic will be converted into the right
to acquire, on the same terms and conditions, shares of PPI Class
A Common Stock with the number of shares and exercise price
applicable to such option adjusted based on the applicable
exchange ratio for the underlying Class A Common Stock of
Corvallis Clinic, Class A Shares of HealthFirst or Common Stock
of Medford Clinic, as the case may be.
The complete text of the Reorganization and Merger Agreement is attached as
Appendix A to the accompanying Joint Proxy Statement/Prospectus. For details of
the number of shares of PPI Class A Common Stock allocated to the shareholders
of each Company based on the number of full-time-
2
<PAGE>
equivalent physicians and other specified providers of such Company, see
"Summary -- The Merger" of such accompanying Joint Proxy Statement/Prospectus.
3. To consider and vote upon a proposal to approve four plans (referred to
collectively herein as the "PPI Incentive Compensation Plans"):
(i) the Physician Partners, Inc. Employee Stock Option Plan;
(ii) the Physician Partners, Inc. Non-Employee Director Stock Option
Plan;
(iii) the Physician Partners, Inc. Non-Employee Provider Stock Option
Plan; and
(iv) the Physician Partners, Inc. Change in Control Plan,
under which a total of up to 2,500,000 shares of PPI Class A Common Stock will
be available for issuance to.
(A) providers employed by Corvallis Clinic New PC or any other
newly-formed professional corporation with which PPI enters
into a practice management agreement;
(B) officers and employees of PPI or any of its operating
subsidiaries; and
(C) non-employee members of the Board of Directors of PPI.
Copies of the PPI Incentive Compensation Plans are attached as Appendices B,
C, D and E to the accompanying Joint Proxy Statement/Prospectus.
4. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Only shareholders of record at the close of business on November 8, 1996,
will be entitled to notice of and to vote at the Special Meeting or any
adjournment thereof.
The terms and conditions of the Reorganization and Merger Agreement are
described in the accompanying Joint Proxy Statement/Prospectus.
------------------------
YOUR VOTE IS IMPORTANT. The affirmative vote of two-thirds of the
outstanding shares of Class A Preferred Stock of Corvallis Clinic and two-thirds
of the outstanding shares of Class B Common Stock of Corvallis Clinic, in each
case as a voting group, is necessary for approval of the proposals described
herein at the Special Meeting. THEREFORE, PLEASE COMPLETE, SIGN, DATE AND RETURN
THE ENCLOSED PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING, NO LATER THAN DECEMBER 19, 1996. A return envelope is enclosed
for your convenience and requires no postage for mailing in the United States.
Proxies are revocable at any time prior to the time they are voted, and
shareholders who are present at the Special Meeting may withdraw their proxies
and vote in person if they so desire.
When a proxy is properly executed and returned, the shares of Class A
Preferred Stock of Corvallis Clinic and Class B Common Stock of Corvallis Clinic
will be voted in accordance with the directions indicated on the proxy, or if no
directions are indicated, such shares will be voted FOR each of the Corvallis
Clinic Reorganization Proposal, the Merger Proposal and the PPI Incentive
Compensation Plans Proposal. Additional terms and conditions of the proxy are
described in the accompanying Joint Proxy Statement/Prospectus.
By Order of the Board of Directors
--------------------------------------
Darrel D. Bibler, M.D., Secretary
November , 1996
3
<PAGE>
[LETTERHEAD OF MEDFORD CLINIC, P.C.]
IMPORTANT SHAREHOLDER COMMUNICATION
November , 1996
Dear Shareholder:
You are cordially invited and encouraged to attend the special meeting (the
"Special Meeting") of shareholders of Medford Clinic, P.C., an Oregon
professional corporation ("Medford Clinic"), to be held on Monday, December 16,
1996, at 555 Black Oak Drive, Medford, Oregon 97504, commencing at 6:00 p.m.
(Pacific Standard Time). At the Special Meeting, shareholders of Medford Clinic
will consider and make a fundamental determination regarding the future
direction of Medford Clinic.
REORGANIZATION AND MERGER
More specifically, at the Special Meeting, shareholders will be asked to
consider and vote upon three proposals (the "Proposals") in connection with the
Amended and Restated Agreement and Plan of Reorganization and Merger, dated as
of September 19, 1996, as amended on November 4, 1996 (referred to herein, as so
amended, as the "Reorganization and Merger Agreement"), among Medford Clinic,
HealthFirst Medical Group, P.C., an Oregon professional corporation
("HealthFirst"), The Corvallis Clinic, P.C., an Oregon professional corporation
("Corvallis Clinic" and, together with Medford Clinic and HealthFirst, referred
to herein, collectively, as the "Companies"), and Physician Partners, Inc., a
newly-formed Delaware corporation ("PPI").
The Reorganization and Merger Agreement contemplates that each Company will
effect a reorganization of its corporate structure and a merger with and into
PPI resulting in a consolidation of the operations (other than the provider
professional services businesses) of the Companies. Upon consummation of the
transactions contemplated by the Reorganization and Merger Agreement, each
shareholder of Medford Clinic will be a stockholder of PPI as well as a
shareholder of a newly-formed Oregon professional corporation ("Medford Clinic
New PC"), and PPI and Medford Clinic New PC will be parties to a 40-year
practice management agreement (the "Management Agreement"). It is a condition to
the consummation of the transactions contemplated by the Reorganization and
Merger Agreement that the holders of a majority of Common Stock of Medford
Clinic vote in person or by proxy at the Special Meeting FOR the approval
thereof.
The first two Proposals arising under the Reorganization and Merger
Agreement seek the approval, respectively, of (1) the distribution (the "Medford
Clinic Distribution") by Medford Clinic to its shareholders of the entire equity
interest in Medford Clinic New PC, a newly-formed Oregon professional
corporation and a subsidiary of Medford Clinic to which the provider
professional services business of Medford Clinic will be transferred, and (2)
the merger (the "Merger") of Medford Clinic, reorganized to hold the physician
practice management business, HealthFirst and Corvallis Clinic (each of which
would be similarly reorganized) with and into PPI.
The transfer of the provider professional services business to Medford
Clinic New PC and the subsequent Medford Clinic Distribution is necessary to
comply with Oregon law restrictions on non-physician ownership or control of a
medical practice. Shareholders of Medford Clinic at the time of such
reorganization and Merger would hold, after consummation thereof, common stock
of both Medford Clinic New PC and PPI. The number of shares of common stock of
PPI which shareholders of Medford Clinic will receive in the Merger is based on
an exchange ratio described in the accompanying Joint Proxy
Statement/Prospectus. For details of the number of shares of PPI Class A Common
Stock allocated to the shareholders of each Company based on the number of
full-time-equivalent physicians and other specified providers of such Company,
see "Summary -- The Merger" of such accompanying Joint Proxy Statement/
Prospectus.
The shares of common stock of PPI to be received by each shareholder of
Medford Clinic as consideration in the Merger will be subject to repurchase by
PPI, at its option, at a price equal to (a) the
<PAGE>
fair market value of such shares at the time of such repurchase, in the event
such shareholder ceases (for reasons other than death, disability or retirement)
to be an employee or member of the board of directors of (i) PPI, or (ii) any
professional corporation with which PPI has entered into a Management Agreement,
or (b) the lesser of (i) the fair market value of such shares at the time of
issuance thereof to such shareholder or (ii) the fair market value of such
shares at the time of such repurchase, in either case in the event such
shareholder undertakes activities which are competitive with PPI or physician
groups with which PPI has entered into a Management Agreement.
MANAGEMENT AGREEMENT
In connection with the reorganization of Medford Clinic, the Management
Agreement will be entered into between Medford Clinic and Medford Clinic New PC.
Upon consummation of the Merger, PPI would succeed to Medford Clinic's rights
and obligations under the Management Agreement and would provide to Medford
Clinic New PC management and administrative services and facilities and
equipment. As consideration, PPI would be entitled to (a) reimbursement of all
Manager's Expenses (as such term is hereinafter defined) incurred by PPI and (b)
a management fee equal to 16% of the "Distributable Profit Amount" (defined as
(i) gross revenues, booked on an accrual basis and subtracting specified
contractual allowances and bad debt, received by PPI or Medford Clinic New PC
relating to services provided by Medford Clinic New PC less (ii) Manager's
Expenses). Medford Clinic New PC will be responsible for provider compensation
and benefits. Medford Clinic New PC will be the entity responsible for the
practice of medicine. The term "Manager's Expenses" is defined in the Management
Agreement to mean the actual cost of all operating and non-operating expenses
incurred by PPI in the operation of Medford Clinic New PC's medical offices. Any
allocation of costs (as opposed to a pass-through of actual direct costs
incurred by PPI in connection with the operation of Medford Clinic New PC
medical offices, for which PPI shall be reimbursed in full) by PPI to Medford
Clinic New PC shall require approval of the joint management board (composed of
PPI and Medford Clinic New PC representatives) of the proposed cost allocation
for a defined period of time prior to implementation of the function for which a
cost allocation is proposed. "Manager's Expenses" expressly will not include any
corporate overhead charges of PPI (other than as expressly agreed to in the
Management Agreement), federal or state income taxes of PPI or Medford Clinic
New PC, any expenses which are expressly designated as obligations to be assumed
solely by PPI, and any amortization expense resulting from the amortization of
costs in connection with the execution of the Management Agreement.
The Management Agreement will also provide for a Joint Management Board to
govern and monitor the contractual relationship (including budgetary matters)
between PPI and Medford Clinic New PC. In addition, it will require Medford
Clinic New PC to make payments to PPI in the event certain Medford Clinic New PC
providers engage in competition against Medford Clinic New PC. It is anticipated
that each provider who is employed or promoted by Medford Clinic New PC
subsequent to September 17, 1996 will enter into an employment agreement
containing a noncompetition covenant requiring such provider to, in effect,
indemnify Medford Clinic New PC in the event Medford Clinic New PC becomes
obligated to make any such payment under the Management Agreement to PPI as a
result of such provider's competitive activities.
The terms and conditions of the Reorganization and Merger Agreement and
related documentation are described in the accompanying Joint Proxy
Statement/Prospectus. The complete text of the Reorganization and Merger
Agreement is attached as Appendix A to the accompanying Joint Proxy Statement/
Prospectus.
STOCK OPTION PLAN
The third Proposal to be considered and voted upon by Medford Clinic
shareholders at the Special Meeting seeks approval of various PPI incentive
compensation plans, copies of which are attached as Appendices B, C, D and E to
the accompanying Joint Proxy Statement/Prospectus.
2
<PAGE>
Each of the Proposals to be considered and voted upon at the Special Meeting
is described in greater detail in the accompanying Joint Proxy
Statement/Prospectus.
PURPOSE OF TRANSACTIONS
The Board of Directors of Medford Clinic believes that in order to fund the
expansion of provider base and supporting facilities, including sophisticated
information systems, necessary to meet service needs, the ability to raise
capital is critical for the future of Medford Clinic. By merging with
HealthFirst and Corvallis Clinic, both of which share similarities with Medford
Clinic in values, style of practice and governance, and, thus are good merger
partners, the merged entity would be in a much stronger position to raise
capital than Medford Clinic alone. Such Board of Directors also believes that
PPI should be able to realize cost savings through economies of scale and that
such entity would have an enhanced capacity to provide a high quality of
clinical care and to compete economically in both managed care and fee-for-
service markets.
RECOMMENDATION OF THE BOARD OF DIRECTORS
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF MEDFORD CLINIC HAS
UNANIMOUSLY APPROVED THE REORGANIZATION AND MERGER AGREEMENT AND THE PROPOSALS
AND RECOMMENDS THAT YOU VOTE IN FAVOR THEREOF AT THE SPECIAL MEETING. Each of
the directors and executive officers of Medford Clinic has indicated that it is
his or her present intention to vote all of the shares held thereby FOR approval
of the Proposals. The Medford Clinic management has also indicated its present
intention to support approval of the Proposals.
------------------------
VOTING PROCEDURES
The affirmative vote of a majority of the outstanding shares of Common Stock
of Medford Clinic is necessary for approval of the Proposals. It is important
that your shares of Common Stock of Medford Clinic be voted at the Special
Meeting. FAILURE OF A SHAREHOLDER TO SUBMIT A PROXY OR VOTE AT THE SPECIAL
MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE APPROVAL OF THE
PROPOSALS. THEREFORE, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, NO
LATER THAN DECEMBER 16, 1996. A return envelope is enclosed for your convenience
and requires no postage for mailing in the United States. When a proxy is
properly executed and returned, shares of Common Stock of Medford Clinic will be
voted in accordance with the directions indicated on the proxy, or if no
directions are indicated, such shares will be voted FOR each of the Medford
Clinic Reorganization Proposal, the Merger Proposal and the PPI Incentive
Compensation Plans Proposal.
This will not prevent you from voting such shares in person in the event
that you attend the Special Meeting. Any Medford Clinic shareholder giving a
proxy may revoke his or her proxy at any time before it is voted at the Special
Meeting by (i) providing written notice of such revocation to Medford Clinic,
(ii) signing and delivering a proxy bearing a later date, to Jon Ness,
Secretary, Medford Clinic, P.C., 555 Black Oak Drive, Medford, Oregon 97504 or
(iii) attending the Special Meeting and voting in person.
We look forward to seeing you on Monday, December 16, 1996.
Sincerely,
--------------------------------------
Steven Schnugg, M.D.
PRESIDENT
3
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MEDFORD CLINIC, P.C.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 16, 1996
To the Shareholders of Medford Clinic, P.C.:
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of the
shareholders of Medford Clinic, P.C., an Oregon professional corporation
("Medford Clinic"), will be held on December 16, 1996, at 555 Black Oak Drive,
Medford, Oregon 97504, commencing at 6:00 p.m. (Pacific Standard Time), for the
following purposes:
1. To consider and vote upon a proposal to approve the following
constituting the Medford Clinic Reorganization Proposal:
(a) the Medford Clinic Asset Transfer (as such term is defined below);
(b) the Medford Clinic Conversion (as such term is defined below) and
other transactions contemplated by the Medford Clinic Reorganization
Transactions (as such term is defined below);
(c) the provisions of the Amended and Restated Agreement and Plan of
Reorganization and Merger, dated as of September 19, 1996, as amended
on November 4, 1996 (referred to herein, as so amended, as the
"Reorganization and Merger Agreement"), among Medford Clinic, The
Corvallis Clinic, P.C., an Oregon professional corporation
("Corvallis Clinic"), HealthFirst Medical Group, P.C., an Oregon
professional corporation ("HealthFirst"), and Physician Partners,
Inc., a newly-formed Delaware corporation ("PPI"), relating to the
Medford Clinic Reorganization Transactions.
Pursuant to the Reorganization and Merger Agreement, Medford Clinic will
effect the following transactions (referred to herein, collectively, as the
"Medford Clinic Reorganization Transactions"):
(i) Medford Clinic will incorporate, as a wholly-owned subsidiary
thereof, a professional corporation ("Medford Clinic New PC")
under the Oregon Professional Corporation Act;
(ii) Medford Clinic will transfer to Medford Clinic New PC certain of
Medford Clinic's assets relating to the provider professional
services business of Medford Clinic, which assets are expected to
be intangible assets related to the practice of medicine,
including employment agreements with providers, medical records
and insurance contracts (referred to herein, collectively, as the
"Medford Clinic New PC Assets"), and cause Medford Clinic New PC
to assume liabilities of Medford Clinic relating to the Medford
Clinic New PC Assets ("Medford Clinic Asset Transfer");
(iii) Medford Clinic will make a distribution under which the
shareholders of Medford Clinic will receive all of the issued and
outstanding shares of capital stock of Medford Clinic New PC,
allocated on a pro rata basis in accordance with the fair market
value of each such shareholder's then-current equity interest in
Medford Clinic (such distribution being referred to herein as the
"Medford Clinic Distribution");
(iv) Medford Clinic will convert from an Oregon professional
corporation to an Oregon business corporation (such conversion
being referred to herein as the "Medford Clinic Conversion") by
filing Restated Articles of Incorporation, together with the
required fee, with the Secretary of State of the State of Oregon
in accordance with the Oregon Professional Corporation Act and
the Oregon Business Corporation Act (collectively, the "Oregon
Law"); and
(v) Medford Clinic will enter into a 40-year practice management
agreement with Medford Clinic New PC.
<PAGE>
2. To consider and vote upon a proposal to approve the following
constituting the Merger Proposal:
(a) the Merger (as such term is defined below); and
(b) the provisions of the Reorganization and Merger Agreement relating to
the Merger Transactions (as such term is defined below).
Pursuant to the Reorganization and Merger Agreement, the Companies will
effect the following transactions (referred to herein, collectively, as the
"Merger Transactions"):
(i) Medford Clinic, HealthFirst and Corvallis Clinic (each being, at
such time, a newly-converted Oregon business corporation) will
merge with and into PPI (the "Merger"), which Merger will occur
as promptly as practicable after the consummation of similar
reorganization transactions by each of HealthFirst and Corvallis
Clinic as described in the Reorganization and Merger Agreement;
(ii) each outstanding share of Common Stock of Medford Clinic, other
than the shares held by those shareholders who take required
actions to properly assert their dissenters' rights under the
Oregon Business Corporation Act, will be converted into the right
to receive 27,424 shares of Class A Common Stock, par value $0.01
per share ("PPI Class A Common Stock"), of PPI (the term "par
value" denotes a stated value of capital stock, determined
somewhat arbitrarily and generally bearing no relation to the
market or actual value of such capital stock);
(iii) each outstanding Class A Share of HealthFirst, other than the
shares held by those shareholders who take required actions to
properly assert their dissenters' rights under the Oregon
Business Corporation Act, will be converted into the right to
receive 308 shares of PPI Class A Common Stock;
(iv) each outstanding share of Class A Preferred Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 1,454 shares of PPI Class A Common Stock;
(v) each outstanding share of Class B Common Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 163 shares of PPI Class A Common Stock;
(vi) each outstanding share of Class C Preferred Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 6 shares of PPI Class A Common Stock; and
(vii) each outstanding option to purchase Common Stock of Medford
Clinic, Series 1 of Class A Shares of HealthFirst and Class B
Common Stock of Corvallis Clinic will be converted into the right
to acquire, on the same terms and conditions, shares of PPI Class
A Common Stock with the number of shares and exercise price
applicable to such option adjusted based on the applicable
exchange ratio for the underlying Common Stock of Medford Clinic,
Class A Shares of HealthFirst or Class B Common Stock of
Corvallis Clinic, as the case may be.
The complete text of the Reorganization and Merger Agreement is attached as
Appendix A to the accompanying Joint Proxy Statement/Prospectus. For details of
the number of shares of PPI Class A Common Stock allocated to the shareholders
of each Company based on the number of full-time-
2
<PAGE>
equivalent physicians and other specified providers of such Company, see
"Summary -- the Merger" of such accompanying Joint Proxy Statement/Prospectus.
3. To consider and vote upon a proposal to approve four plans (referred to
collectively herein as the "PPI Incentive Compensation Plans"):
(i) the Physician Partners, Inc. Employee Stock Option Plan;
(ii) the Physician Partners, Inc. Non-Employee Director Stock Option
Plan;
(iii) the Physician Partners, Inc. Non-Employee Provider Stock Option
Plan; and
(iv) the Physician Partners, Inc. Change in Control Plan,
under which a total of up to 2,500,000 shares of PPI Class A Common Stock will
be available for issuance to
(A) providers employed by Medford Clinic New PC or any other
newly-formed professional corporation with which PPI enters
into a practice management agreement;
(B) officers and employees of PPI or any of its operating
subsidiaries; and
(C) non-employee members of the Board of Directors of PPI.
Copies of the PPI Incentive Compensation Plans are attached as Appendices B,
C, D and E to the accompanying Joint Proxy Statement/Prospectus.
4. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Only shareholders of record at the close of business on November 8, 1996,
will be entitled to notice of and to vote at the Special Meeting or any
adjournment thereof.
The terms and conditions of the Reorganization and Merger Agreement are
described in the accompanying Joint Proxy Statement/Prospectus.
------------------------
YOUR VOTE IS IMPORTANT. The affirmative vote of a majority of the
outstanding shares of Common Stock of Medford Clinic is necessary for approval
of the proposals described herein at the Special Meeting. THEREFORE, PLEASE
COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE, WHETHER
OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, NO LATER THAN DECEMBER 16, 1996.
A return envelope is enclosed for your convenience and requires no postage for
mailing in the United States. Proxies are revocable at any time prior to the
time they are voted, and shareholders who are present at the Special Meeting may
withdraw their proxies and vote in person if they so desire.
When a proxy is properly executed and returned, the shares of Common Stock
of Medford Clinic will be voted in accordance with the directions indicated on
the proxy, or if no directions are indicated, such shares will be voted FOR each
of the Medford Clinic Reorganization Proposal, the Merger Proposal and
3
<PAGE>
the PPI Incentive Compensation Plans Proposal. Additional terms and conditions
of the proxy are described in the accompanying Joint Proxy Statement/Prospectus.
By Order of the Board of Directors
--------------------------------------
Jon Ness, Secretary
November , 1996
4
<PAGE>
These materials constitute preliminary proxy materials filed with respect to
forthcoming special meetings of shareholders of HealthFirst Medical Group, P.C.,
The Corvallis Clinic, P.C. and Medford Clinic, P.C., respectively. Certain
information is presented as it is expected to exist when definitive proxy
materials are mailed to shareholders of HealthFirst Medical Group, P.C., The
Corvallis Clinic, P.C. and Medford Clinic, P.C., respectively, and will be
revised to reflect actual facts at that time.
JOINT PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS OF
HEALTHFIRST MEDICAL GROUP, P.C.
TO BE HELD ON DECEMBER 18, 1996
SPECIAL MEETING OF SHAREHOLDERS OF
THE CORVALLIS CLINIC, P.C.
TO BE HELD ON DECEMBER 19, 1996
SPECIAL MEETING OF SHAREHOLDERS OF
MEDFORD CLINIC, P.C.
TO BE HELD ON DECEMBER 16, 1996
PHYSICIAN PARTNERS, INC.
PROSPECTUS
This Joint Proxy Statement/Prospectus is provided in connection with the
solicitation by:
(i) the Board of Directors of HealthFirst Medical Group, P.C., an Oregon
professional corporation ("HealthFirst"), of proxies from holders of
Class A Shares of HealthFirst ("HealthFirst Class A Shares") and for
use at the special meeting of HealthFirst shareholders to be held on
Wednesday, December 18, 1996 and at any adjournment thereof (the
"HealthFirst Special Meeting");
(ii) the Board of Directors of The Corvallis Clinic, P.C., an Oregon
professional corporation ("Corvallis Clinic"), of proxies from
holders of shares of Class A Preferred Stock of Corvallis Clinic
("Corvallis Clinic Class A Stock") and Class B Common Stock of
Corvallis Clinic ("Corvallis Clinic Class B Stock") for use at the
special meeting of Corvallis Clinic shareholders to be held on
Thursday, December 19, 1996 and at any adjournment thereof (the
"Corvallis Clinic Special Meeting"); and
(iii) the Board of Directors of Medford Clinic, P.C., an Oregon
professional corporation ("Medford Clinic" and, together with
HealthFirst and Corvallis Clinic, referred to herein, collectively,
as the "Companies"), of proxies from holders of shares of Common
Stock of Medford Clinic ("Medford Clinic Common Stock") for use at
the special meeting of Medford Clinic shareholders to be held on
Monday, December 16, 1996 and at any adjournment thereof (the
"Medford Clinic Special Meeting").
This Joint Proxy Statement/Prospectus relates to the transactions
contemplated by the Amended and Restated Agreement and Plan of Reorganization
and Merger, dated as of September 19, 1996, as amended on November 4, 1996
(referred to herein, as so amended, as the "Reorganization and Merger
Agreement"), by and among HealthFirst, Corvallis Clinic, Medford Clinic and
Physician Partners, Inc., a newly-formed Delaware corporation ("PPI"). The
Reorganization and Merger Agreement provides for:
(i) the HealthFirst Reorganization Transactions, the Corvallis Clinic
Reorganization Transactions and the Medford Clinic Reorganization
Transactions (as such terms are defined herein and, collectively,
the "PC Reorganization Transactions"); and
<PAGE>
(ii) the Merger Transactions (as such term is defined herein).
The complete text of the Reorganization and Merger Agreement is attached
hereto as Appendix A and is incorporated herein by this reference.
THE BOARD OF DIRECTORS OF HEALTHFIRST HAS UNANIMOUSLY APPROVED THE
REORGANIZATION AND MERGER AGREEMENT AND THE PROPOSALS CONTAINED HEREIN AND
RECOMMEND THAT THE SHAREHOLDERS OF HEALTHFIRST VOTE IN FAVOR THEREOF AT THE
HEALTHFIRST SPECIAL MEETING.
THE BOARD OF DIRECTORS OF CORVALLIS CLINIC HAS UNANIMOUSLY APPROVED THE
REORGANIZATION AND MERGER AGREEMENT AND THE PROPOSALS CONTAINED HEREIN AND
RECOMMEND THAT THE SHAREHOLDERS OF CORVALLIS CLINIC VOTE IN FAVOR THEREOF AT THE
CORVALLIS CLINIC SPECIAL MEETING.
THE BOARD OF DIRECTORS OF MEDFORD CLINIC HAS UNANIMOUSLY APPROVED THE
REORGANIZATION AND MERGER AGREEMENT AND THE PROPOSALS CONTAINED HEREIN AND
RECOMMEND THAT THE SHAREHOLDERS OF MEDFORD CLINIC VOTE IN FAVOR THEREOF AT THE
MEDFORD CLINIC SPECIAL MEETING.
------------------------
This Joint Proxy Statement/Prospectus is a prospectus under the Securities
Act of 1933, as amended (the "Securities Act"), for the issuance of the shares
of PPI Class A Common Stock into which outstanding shares of HealthFirst Class A
Shares, Corvallis Clinic Class A Stock, Corvallis Clinic Class B Stock, Class C
Preferred Stock of Corvallis Clinic ("Corvallis Clinic Class C Stock") and
Medford Clinic Common Stock (referred to herein, collectively, as "Old PC
Shares") will be converted upon consummation of the Merger.
If the HealthFirst Reorganization Proposal and the Merger Proposal are
approved by the shareholders of HealthFirst at the HealthFirst Special Meeting,
the Corvallis Clinic Reorganization Proposal and the Merger Proposal are
approved by the shareholders of Corvallis Clinic at the Corvallis Clinic Special
Meeting and the Medford Clinic Reorganization Proposal and the Merger Proposal
are approved by the shareholders of Medford Clinic at the Medford Clinic Special
Meeting, and if the other conditions specified in the Reorganization and Merger
Agreement, (including the condition that not more than 15% of the outstanding
shares of capital stock of any Company dissent from the Merger) are satisfied or
waived, each of HealthFirst, Corvallis Clinic and Medford Clinic will cease to
exist, with PPI continuing as the surviving corporation of the Merger, and (A)
each outstanding HealthFirst Class A Share will be converted into the right to
receive 308 shares of Class A Common Stock, par value $0.01 per share ("PPI
Class A Common Stock"), of PPI, (B) each outstanding share of Corvallis Clinic
Class A Stock, Corvallis Clinic Class B Stock and Corvallis Clinic Class C Stock
will be converted into the right to receive 1,454 shares of PPI Class A Common
Stock, 163 shares of PPI Class A Common Stock and six shares of PPI Class A
Common Stock, respectively, and (C) each outstanding share of Medford Clinic
Common Stock will be converted into the right to receive 27,474 shares of PPI
Class A Common Stock. For a detailed discussion of the methodology used by the
respective boards of directors of HealthFirst, Corvallis Clinic and Medford
Clinic with respect to the consideration to be received by their respective
shareholders in the Merger, see "HealthFirst's Reasons for the Merger,"
"Corvallis Clinic's Reasons for the Merger" and "The Merger and Related
Transactions--Effects of the Merger." Cash, without interest, will be paid in
lieu of the issuance of fractional shares of PPI Class A Common Stock, rounded
to the nearest cent, equal to the product of such fraction multiplied by the
fair market value of a share of PPI Class A Common Stock as of the effective
time of the Merger (the "Effective Time") as determined by the Board of
Directors of PPI (the "PPI Board").
The shares of common stock of PPI to be received by each shareholder of each
Company as consideration in the Merger will be subject to repurchase by PPI, at
its option, at a price equal to (a) the fair market value at the time of such
repurchase, in the event such shareholder ceases (for reasons other than death,
disability or retirement) to be an employee or member of the board of directors
of (i) PPI or (ii) any professional corporation with which PPI has entered into
a practice management agreement (a "New PC Management Agreement") or (b) the
lesser of (i) the fair market value of such shares at the time of issuance
thereof to such shareholder or (ii) the fair market value of such shares at the
time of such
<PAGE>
repurchase, in either case in the event such shareholder undertakes activities
which are competitive with PPI or physician groups with which PPI has entered
into a practice management agreement.
The approximate date of mailing of this Joint Proxy Statement/Prospectus and
the accompanying proxy is November , 1996.
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED WHEN
EVALUATING THE TRANSACTIONS CONTEMPLATED BY THIS JOINT PROXY
STATEMENT/PROSPECTUS, SEE "RISK FACTORS" ON PAGES 23 THROUGH 32 OF THIS JOINT
PROXY STATEMENT/PROSPECTUS.
NEITHER THE MERGER NOR THE SECURITIES TO BE ISSUED IN THE MERGER HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Joint Proxy Statement/Prospectus is November , 1996, and
it was mailed on or about such date.
<PAGE>
AVAILABLE INFORMATION
PPI has filed a registration statement on Form S-4 (the "Registration
Statement") under the Securities Act, with the Securities and Exchange
Commission (the "SEC") covering the PPI Class A Common Stock to be issued
pursuant to the Reorganization and Merger Agreement. As permitted by the rules
and regulations of the SEC, this Joint Proxy Statement/Prospectus does not
contain all information set forth in the Registration Statement and exhibits
thereto. For further information, please refer to the Registration Statement,
including the exhibits thereto, all of which are available for inspection and
copying at prescribed rates at the public reference facilities maintained by the
SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549, and at the regional offices of the SEC located at 5670 Wilshire Blvd.,
11th Floor, Los Angeles, California 90036; 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and 7 World Trade Center, Suite 1300, New York,
New York 10048. Statements contained in this Joint Proxy Statement/Prospectus
relating to the contents of any contract or other document referred to herein
are not necessarily complete, and reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement or such
other document, each such statement being qualified in all respects by such
reference.
* * *
All information in this Joint Proxy Statement/Prospectus concerning
HealthFirst and its affiliates has been furnished by HealthFirst. All
information in this Joint Proxy Statement/Prospectus concerning Corvallis Clinic
and its affiliates has been furnished by Corvallis Clinic. All information in
this Joint Proxy Statement/Prospectus concerning Medford Clinic and its
affiliates has been furnished by Medford Clinic. All information in this Joint
Proxy Statement/Prospectus concerning PPI has been furnished by PPI.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS JOINT
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO EXCHANGE OR SELL, OR
A SOLICITATION OF AN OFFER TO EXCHANGE OR PURCHASE, THE SECURITIES OFFERED
HEREBY, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO ANY
PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SHARES
OF PPI CLASS A COMMON STOCK MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET
FORTH HEREIN OR THE AFFAIRS OF PPI, HEALTHFIRST, CORVALLIS CLINIC OR MEDFORD
CLINIC SINCE THE DATE HEREOF.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION................................................................. i
SUMMARY............................................................................... 1
General............................................................................. 1
Risk Factors........................................................................ 2
The Companies....................................................................... 2
Background of the Merger............................................................ 3
Physician Partners, Inc............................................................. 3
Meetings of the Shareholders........................................................ 5
Record Date and Vote Required....................................................... 5
The Merger.......................................................................... 6
Comparison of Shares and Options.................................................... 6
The PC Reorganization Transactions.................................................. 8
Terms of the Reorganization and Merger.............................................. 9
Government and Regulatory Approvals................................................. 9
Closing and Effective Time of the Merger............................................ 10
Interests of Certain Persons in the Merger.......................................... 10
Potential Adverse Consequences to Shareholders...................................... 11
Conditions of the PC Reorganization Transactions and the Merger..................... 12
Termination of the PC Reorganization Transactions and the Merger.................... 12
Closing and Effective Time of the PC Reorganization Transactions and the Merger..... 13
Effect of Merger on New Options..................................................... 13
Recommendations of the Boards of Directors.......................................... 13
Federal Income Tax Considerations................................................... 14
Accounting Treatment................................................................ 15
Dissenters' Rights Regarding the Merger............................................. 15
Exchange/Issuance of Stock Certificates in the Merger............................... 15
Summary Financial Data of the Companies and PPI..................................... 16
RISK FACTORS.......................................................................... 23
Lack of Combined Operating History; New Company..................................... 23
PPI's Dependence on New PCs......................................................... 23
Recent Operating Losses of Certain Companies........................................ 24
Risks Related to Capitation......................................................... 24
Reduction in Third-Party Payor Reimbursement........................................ 24
Concentration of Payors............................................................. 25
Growth Strategy; Capital Requirements............................................... 25
Competition......................................................................... 26
Exposure to Professional Liability Claims........................................... 26
Government Regulation............................................................... 27
Anti-Takeover Considerations........................................................ 29
Management Information System and Other Technology Needs............................ 30
Possible Inability to Retain or Attract Key Personnel; Dependence on Executive
Officers.......................................................................... 31
Consent to Assignment of Health Plan Contracts...................................... 31
No Public Trading Market for PPI Class A Common Stock............................... 31
PPI's Repurchase Right.............................................................. 31
Income Tax Risks.................................................................... 31
Risks Relating to Failure to Approve the Merger and PC Reorganization
Transactions...................................................................... 32
THE HEALTHFIRST SHAREHOLDER MEETING................................................... 33
Time, Date and Place of HealthFirst Meeting......................................... 33
</TABLE>
ii
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Business to be Conducted at the HealthFirst Meeting................................. 33
Proxies: Voting and Revocation...................................................... 33
Proxy Solicitation.................................................................. 33
Vote Required....................................................................... 33
Other Matters....................................................................... 34
THE CORVALLIS CLINIC SHAREHOLDER MEETING.............................................. 34
Time, Date and Place of Corvallis Clinic Meeting.................................... 34
Business to be Conducted at the Corvallis Clinic Meeting............................ 34
Proxies: Voting and Revocation...................................................... 34
Proxy Solicitation.................................................................. 35
Vote Required....................................................................... 35
Other Matters....................................................................... 35
THE MEDFORD CLINIC SHAREHOLDER MEETING................................................ 35
Time, Date and Place of Medford Clinic Meeting...................................... 35
Business to be Conducted at the Medford Clinic Meeting.............................. 35
Proxies: Voting and Revocation...................................................... 36
Proxy Solicitation.................................................................. 36
Vote Required....................................................................... 36
Other Matters....................................................................... 37
THE MERGER AND RELATED TRANSACTIONS................................................... 38
General............................................................................. 38
Background of the Merger............................................................ 38
HealthFirst's Reasons for the Merger................................................ 40
HealthFirst Board's Recommendation.................................................. 43
Corvallis Clinic's Reasons for the Merger........................................... 43
Corvallis Clinic Board's Recommendation............................................. 46
Medford Clinic's Reasons for the Merger............................................. 46
Medford Clinic Board's Recommendation............................................... 48
Failure to Approve the Merger....................................................... 48
THE PC REORGANIZATION TRANSACTIONS AND RELATED TRANSACTIONS........................... 49
General............................................................................. 49
HealthFirst's Reasons for the HealthFirst Reorganization Transactions............... 49
HealthFirst Board's Recommendation.................................................. 50
Corvallis Clinic's Reasons for the Corvallis Clinic Reorganization Transactions..... 50
Corvallis Clinic Board's Recommendation............................................. 50
Medford Clinic's Reasons for the Medford Clinic Reorganization Transactions......... 51
Medford Clinic's Board Recommendation............................................... 51
Failure to Approve the PC Reorganization Transactions............................... 51
TERMS OF THE REORGANIZATION AND MERGER................................................ 52
Closing and Effective Time of the Merger............................................ 52
Conditions of the Reorganization and Merger Agreement............................... 52
Conduct of Businesses of Companies Pending the Merger............................... 53
Termination of the Reorganization and Merger Agreement.............................. 54
Expense Sharing Agreement........................................................... 54
Interests of Certain Persons in the Merger.......................................... 55
Shareholder Approvals............................................................... 59
Rights of Security Holders.......................................................... 59
Government and Regulatory Approvals................................................. 63
Federal Income Tax Considerations................................................... 63
</TABLE>
iii
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Accounting Treatment................................................................ 64
Dissenters' Rights Regarding the Merger............................................. 65
Break-Up Fee........................................................................ 67
Effects of the Merger............................................................... 67
Effect on New Stock Option Plans.................................................... 69
Effect on Existing Employee Benefit Plans........................................... 70
Exchange/Issuance of Stock Certificates in the Merger............................... 70
Payment in Lieu of Fractional Shares................................................ 71
PPI's Right to Repurchase PPI Class A Common Stock.................................. 71
Resales of PPI Class A Common Stock and Registration Rights......................... 71
PHYSICIAN PRACTICE MANAGEMENT INDUSTRY................................................ 73
General............................................................................. 73
The Industry........................................................................ 73
Capitation.......................................................................... 74
Benefits a PPM Can Provide a Group Practice......................................... 75
Government Regulation............................................................... 75
Management Information Systems...................................................... 77
OPERATION, MANAGEMENT AND BUSINESS OF PPI FOLLOWING THE MERGER........................ 78
Business of PPI..................................................................... 78
The PPI Strategy.................................................................... 78
Practice Management Agreement....................................................... 79
Properties and Facilities of PPI.................................................... 80
Legal Proceedings................................................................... 80
Compensation of Directors........................................................... 83
Compensation of Executive Officers.................................................. 83
Indemnification Agreements.......................................................... 85
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements...................................................................... 85
Certain Transactions................................................................ 85
Description of Capital Stock of PPI................................................. 86
PPI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................... 88
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS OF PPI, INCLUDING NOTES THERETO.... 91
BUSINESS OF HEALTHFIRST............................................................... 100
General............................................................................. 100
Strategy............................................................................ 101
Government Regulation............................................................... 101
Services Provided................................................................... 102
Marketing and Development........................................................... 103
Competition......................................................................... 103
Employees........................................................................... 103
Insurance........................................................................... 104
Properties and Facilities........................................................... 104
Information Systems................................................................. 104
Legal Proceedings................................................................... 105
DESCRIPTION OF CAPITAL STOCK OF HEALTHFIRST........................................... 106
SELECTED FINANCIAL DATA OF HEALTHFIRST................................................ 107
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HEALTHFIRST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................... 108
Overview............................................................................ 108
Results of Operations............................................................... 109
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995........... 109
Twelve Months Ended December 31, 1995 Compared to Twelve Months Ended December 31,
1994.............................................................................. 112
Twelve Months Ended December 31, 1994 Compared to Twelve Months Ended December 31,
1993.............................................................................. 113
Liquidity and Capital Resources..................................................... 114
BUSINESS OF CORVALLIS CLINIC.......................................................... 116
General............................................................................. 116
Business Strategy................................................................... 117
Government Regulation............................................................... 117
Services Provided................................................................... 117
Marketing and Development........................................................... 118
Competition......................................................................... 118
Employees........................................................................... 118
Insurance........................................................................... 119
Properties and Facilities........................................................... 119
Information Systems................................................................. 120
Legal Proceedings................................................................... 120
DESCRIPTION OF CAPITAL STOCK OF CORVALLIS CLINIC...................................... 121
SELECTED FINANCIAL DATA OF CORVALLIS CLINIC........................................... 122
CORVALLIS CLINIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................................ 123
Overview............................................................................ 123
Results of Operations............................................................... 124
Seven Months Ended June 30, 1996 Compared to Seven Months Ended June 30, 1995....... 124
Twelve Months Ended November 30, 1995 Compared to Twelve Months Ended November 30,
1994.............................................................................. 126
Twelve Months Ended November 30, 1994 Compared to Twelve Months Ended November 30,
1993.............................................................................. 128
Liquidity and Capital Resources..................................................... 129
BUSINESS OF MEDFORD CLINIC............................................................ 130
General............................................................................. 130
Strategy............................................................................ 130
Government Regulation............................................................... 131
Services Provided................................................................... 131
Marketing and Development........................................................... 133
Competition......................................................................... 133
Employees........................................................................... 133
Insurance........................................................................... 134
Properties and Facilities........................................................... 134
Information Systems................................................................. 134
Legal Proceedings................................................................... 134
DESCRIPTION OF CAPITAL STOCK OF MEDFORD CLINIC........................................ 135
SELECTED FINANCIAL DATA OF MEDFORD CLINIC............................................. 137
</TABLE>
v
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<TABLE>
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MEDFORD CLINIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS................................................................ 138
Overview............................................................................ 138
Results of Operations............................................................... 139
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995........... 139
Twelve Months Ended December 31, 1995 Compared to Twelve Months Ended December 31,
1994.............................................................................. 141
Twelve Months Ended December 31, 1994 Compared to Twelve Months Ended December 31,
1993.............................................................................. 142
Liquidity and Capital Resources..................................................... 144
PROPOSAL NO. 3
APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL............................ 145
Employee Stock Option Plan.......................................................... 145
Non-Employee Director Stock Option Plan............................................. 147
Non-Employee Provider Stock Option Plan............................................. 149
Change in Control Plan.............................................................. 151
Plan Benefits to Officers and Directors............................................. 153
Shareholder Approval and Board Recommendation....................................... 154
FUTURE SHAREHOLDER PROPOSALS.......................................................... 154
EXPERTS............................................................................... 154
LEGAL MATTERS......................................................................... 155
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
FINANCIAL STATEMENTS APPENDICES....................................................... F-2
</TABLE>
APPENDICES
<TABLE>
<S> <C>
Appendix A: Amended and Restated Agreement and Plan of Reorganization................. A-1
Appendix B: PPI Employee Stock Option Plan............................................ B-1
Appendix C: PPI Non-Employee Directors' Option Plan................................... C-1
Appendix D: PPI Non-Employee Provider Option Plan..................................... D-1
Appendix E: PPI Change in Control Plan................................................ E-1
Appendix G: Sections 60.551 through 60.594 of the Oregon Business Corporation Act..... G-1
</TABLE>
vi
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS JOINT PROXY STATEMENT/ PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY
IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO.
GENERAL
This Joint Proxy Statement/Prospectus is provided to shareholders of
HealthFirst, Corvallis Clinic and Medford Clinic, in connection with the
solicitation of proxies by their respective Boards of Directors for use at the
HealthFirst Special Meeting, the Corvallis Clinic Special Meeting and the
Medford Clinic Special Meeting which will be held on December 18, December 19
and December 16, 1996, respectively, (collectively, the "Special Meetings").
At the Special Meetings, shareholders of each of the Companies will consider
and vote on a proposal to approve the Reorganization and Merger Agreement, and
the transactions contemplated therein. Pursuant to the Reorganization and Merger
Agreement:
(i) Each Company will perform certain steps to reorganize (the "HealthFirst
Reorganization Transactions," the "Corvallis Clinic Reorganization
Transactions" and the "Medford Clinic Reorganization Transactions,"
respectively, and, collectively, the "PC Reorganization Transactions")
by (a) incorporating as a wholly-owned subsidiary thereof, a
professional corporation (each, a "New PC"), under the Oregon
Professional Corporation Act, (b) transferring to the New PC certain
assets and liabilities relating to the provider professional services
business, (c) making a distribution under which the shareholders of such
Company will receive all of the issued and outstanding shares of capital
stock of the New PC, allocated on a pro rata basis (except for the
Corvallis Clinic Distribution, under which the shareholders of Corvallis
Clinic will receive capital stock of Corvallis Clinic New PC on a
one-to-one basis, whereby each shareholder will receive in Corvallis
Clinic New PC the same number of shares, with the same designation of
class of shares, as such shareholder owns in Corvallis Clinic) in
accordance with the fair market value of each such shareholder's
then-current equity interest in such Company ("New PC Distribution"),
(d) converting such Company from an Oregon professional corporation to
an Oregon business corporation and (e) entering into a 40-year New PC
Management Agreement. HealthFirst will effectuate the HealthFirst
Reorganization Transactions, Corvallis Clinic will effectuate the
Corvallis Clinic Reorganization Transactions and Medford Clinic will
effectuate the Medford Clinic Reorganization Transactions. The proposals
to approve the HealthFirst Reorganization Transactions, the Corvallis
Clinic Reorganization Transactions and the Medford Clinic Reorganization
Transactions are referred to herein as the "HealthFirst Reorganization
Proposal," the "Corvallis Clinic Reorganization Proposal" and the
"Medford Clinic Reorganization Proposal," respectively;
(ii) PPI, HealthFirst, Corvallis Clinic and Medford Clinic will effect a
merger of HealthFirst, Corvallis Clinic and Medford Clinic with and
into PPI (the "Merger") by undertaking the following "Merger
Transactions": (a) HealthFirst, Corvallis Clinic and Medford Clinic, as
newly-converted Oregon business corporations, will merge with and into
PPI; (b) each outstanding share of each of the Companies, other than
the shares held by those shareholders who take required actions to
properly assert their dissenters' rights under the Oregon Business
Corporation Act, will be converted into the right to receive a
specified number of shares (see "Summary -- The Merger" for the
consideration in the Merger); and (c) each outstanding option to
purchase shares of each of the Companies will be converted into an
option to purchase, on the same terms and conditions, shares of PPI
Class A Common Stock, with the number of such shares and exercise price
applicable to such option adjusted based on the applicable exchange
ratio for the underlying HealthFirst Class A Shares, Corvallis Clinic
Class B Stock or Medford
1
<PAGE>
Clinic Common Stock, as the case may be. The provisions of the
Reorganization and Merger Agreement relating to the Merger Transactions
are referred to herein as the "Merger Proposal."
At the Special Meetings, the shareholders of each of the Companies will also
consider and vote on a proposal to approve the Physician Partners, Inc. Employee
Stock Option Plan, the Physician Partners, Inc. Non-Employee Director Stock
Option Plan, the Physician Partners, Inc. Non-Employee Provider Stock Option
Plan and the Physician Partners, Inc. Change in Control Plan (collectively, the
"PPI Incentive Compensation Plans"), which proposal is referred to herein as the
"PPI Incentive Compensation Plans Proposal."
RISK FACTORS
A number of risk factors should be considered in evaluating the Merger and
Reorganization Transactions and the receipt by the Companies' shareholders of
shares of PPI Class A Common Stock in connection therewith. These risk factors
include: the lack of combined operating history of the Companies, PPI's
dependence on the New PCs, recent operating losses of certain Companies, risks
related to capitation, risks related to reductions in third-party payor
reimbursement, concentration of payors, risks relating to the growth strategy
and capital requirements of PPI, competition risks, risk of exposure to claims
of professional liability, risks relating to government regulation,
anti-takeover considerations, management information system and other technology
needs, PPI's possible inability to retain or attract key personnel and
dependence on executive officers, the need for consent to the assignment of
health plan contracts, the lack of a public trading market for PPI Class A
Common Stock, PPI's repurchase rights, certain income tax risks and risks
relating to the failure to approve the Merger and PC Reorganization
Transactions.
THE COMPANIES
HEALTHFIRST MEDICAL GROUP, P.C.
HealthFirst is an Oregon professional corporation founded in 1909.
HealthFirst (formerly known as Metropolitan Clinic, P.C. ("Metropolitan"))
consummated a business combination, accounted for on the purchase method, with
Suburban Medical Clinic, Inc., an Oregon corporation ("Suburban"), on February
1, 1996. It operates 11 medical facilities located in and around Portland,
Oregon. HealthFirst's physicians and other medical care providers (numbering 121
and 17, respectively, as of November 1, 1996) provide a broad range of primary
care and specialty services, along with certain ancillary services (such as
clinical laboratory and radiology services). The principal executive offices of
HealthFirst are located at 10535 N.E. Glisan, Portland, Oregon 97220, and its
telephone number is (503) 331-8655.
THE CORVALLIS CLINIC, P.C.
Corvallis Clinic is an Oregon professional corporation founded in 1947. It
is a multi-specialty clinic located in the Willamette Valley approximately 45
miles north of Eugene, Oregon and 80 miles south of Portland, Oregon. Corvallis
Clinic currently has two main facilities located in Corvallis, and five
satellite locations in Corvallis, Philomath and Albany, Oregon. As of November
1, 1996, Corvallis Clinic employed 77 physicians and 12 other medical care
providers. Corvallis Clinic provides coverage in most medical specialties. It
has a full-service occupational medicine department and an immediate care center
which is open 365 days a year. In addition to physician services, services are
offered through the physical therapy, radiology, laboratory, pharmacy, and
audiology departments and an optical shop. The principal executive offices of
Corvallis Clinic are located at 444 NW Elks Drive, Corvallis, Oregon 97330. The
telephone number is (541) 754-1374.
2
<PAGE>
MEDFORD CLINIC, P.C.
Medford Clinic is a multi-specialty medical group organized in 1946 as an
Oregon professional corporation. Medford Clinic operates seven medical office
sites in Medford, Oregon and the greater Medford area (including Ashland, Grants
Pass and Talent, Oregon). As of November 1, 1996, Medford Clinic employed 66
physicians and nine other medical care providers. Medford Clinic, at its various
locations, provides a wide range of primary care and specialty physician
services. Additional ancillary services include a clinical laboratory, radiology
services, a pharmacy, a vascular laboratory and a category II ambulatory surgery
center. In addition, Medford Clinic owns and operates two dialysis centers
(Rogue Valley Dialysis Services and Redwood Dialysis Service Center) and manages
certain other hospital-based dialysis centers. The principal executive offices
of Medford Clinic are located at 555 Black Oak Drive, Medford, Oregon 97504, and
the telephone number is (541) 734-3601.
BACKGROUND OF THE MERGER
The original concept of merging multi-specialty clinics was initiated at a
meeting of the board of directors of Corvallis Clinic in May, 1995. Through
additional research of national and regional trends and due to perceived
opportunities in the Oregon market, the board of directors of Corvallis Clinic
agreed to pursue merger possibilities with similar group practices in the State
of Oregon.
Preliminary contacts were made with HealthFirst and Medford Clinic resulting
in commitments of their respective boards of directors to evaluate the
feasibility of a merger. From the fall of 1995 through spring of 1996, a
preliminary compilation of the Companies' respective unaudited historical
financial information was prepared and a management and governance structure was
developed. In the spring of 1996, a Confidentiality Agreement was entered into
among the Companies and significant legal and financial work was initiated. On
June 28, 1996, the Companies entered into a Memorandum of Understanding setting
forth the basic terms of the proposed merger. In late July 1996, the respective
boards of directors of the Companies unanimously approved the Reorganization and
Merger Agreement to proceed with the PC Reorganizations and the Merger
contingent upon shareholder approval. Ultimately, the respective boards of
directors of the Companies concluded the proposed merger was the best available
strategic alternative providing physician governance, economies of scale, size,
access to capital and strong management. It is anticipated that the Merger will
be consummated on or before December 31, 1996.
For a more detailed discussion of the reasons considered by the respective
boards of directors of HealthFirst, Corvallis Clinic and Medford Clinic in
approving the HealthFirst Reorganization Proposal, the Corvallis Clinic
Reorganization Proposal and the Medford Clinic Reorganization Proposal,
respectively, and the Merger Proposal, see "The Merger and Related
Transactions--Background of the Merger, Reasons for the Merger and Board's
Recommendation."
PHYSICIAN PARTNERS, INC.
GENERAL.
PPI is a Delaware corporation newly formed for the purposes of the Merger.
Upon the consummation of the Merger, PPI will provide management services to
medical group practices. At the effective time of the Merger (the "Effective
Time"), each Company will merge with and into PPI and PPI will be the surviving
company. As the combined entity resulting from the Merger of the three
Companies, PPI will provide management and administrative services and
facilities and equipment to (i) HealthFirst New PC under the new PC Management
Agreement with HealthFirst (the "HealthFirst Management Agreement"), (ii)
Corvallis Clinic New PC under the New PC Management Agreement with Corvallis
Clinic (the "Corvallis Clinic Management Agreement") and (iii) Medford Clinic
New PC under the New PC Management Agreement with Medford Clinic (the "Medford
Clinic Management Agreement"). Through these New PC Management Agreements, PPI's
physician practice management operations will involve at the Effective Time
approximately 265 physicians and 40 other medical care providers. The principal
3
<PAGE>
executive offices of PPI are located at 111 SW Columbia Street, Suite 725,
Portland, Oregon 97201 and its telephone number is (503) 224-2249.
Set forth below is a diagram showing the organizational structure of PPI
immediately after the Merger.
[CHART]
BUSINESS STRATEGY.
PPI's strategy is to consolidate medical group practices into networks of
health care providers. Although PPI's operations initially will be concentrated
in the Pacific Northwest, PPI intends to explore growth opportunities
nationally. Within each of its clinics, PPI will seek to achieve a mix of
primary care and specialty physicians who can provide services necessary to
establish a significant market presence. PPI will enhance clinic operations by
centralizing administrative functions and introducing management tools, such as
clinical guidelines, utilization review and outcomes measurement.
PPI will seek to affiliate with highly productive groups with significant
shares of the markets in which they practice and strong reputations among
patients, payors and peers for providing quality medical care. Typically, PPI
will acquire the operating assets of these practices and will contract with the
medical groups for 40 years for management services in exchange for a fixed
percentage of practice revenue. The Company's profitability then will depend on
enhancing operating efficiency, expanding health care services provided,
increasing market share and assisting affiliated providers in managing the
delivery of health care. PPI's network will integrate practices via financial
and clinical systems and will offer groups the opportunity to maintain market
competitive compensation, and to gain access to capital, management expertise,
sophisticated information systems, and managed care contracts. For a detailed
discussion of the business
4
<PAGE>
strategy of PPI as a physician practice management company, see "Operation,
Management and Business of PPI Following the Merger."
MEETINGS OF THE SHAREHOLDERS
The HealthFirst Special Meeting will be held at 6:30 p.m. (Pacific Standard
Time), on Wednesday, December 18, 1996, at Lloyd Center, Red Lion Hotel, 1000 NE
Multnomah Ave., Portland, Oregon 97232.
The Corvallis Clinic Special Meeting will be held at 6:30 p.m. (Pacific
Standard Time), on Thursday, December 19, 1996, at 3680 NW Samaritan Drive,
Corvallis, Oregon 97330.
The Medford Clinic Special Meeting will be held at 6:00 p.m. (Pacific
Standard Time), on Monday, December 16, 1996, at 555 Black Oak Drive, Medford,
Oregon 97504.
At the Special Meetings, shareholders of the respective Companies will be
asked to consider and vote upon the HealthFirst Reorganization Proposal, the
Corvallis Clinic Reorganization Proposal or the Medford Clinic Reorganization
Proposal, as the case may be, and the Merger Proposal. A copy of the
Reorganization and Merger Agreement is attached to this Joint Proxy
Statement/Prospectus as Appendix A. The shareholders also will be asked to
consider and vote upon the PPI Incentive Compensation Plans Proposal. The
principal provisions of the PPI Incentive Compensation Plans are described in
the Section below entitled "Proposal No. 3: Approval of the PPI Incentive
Compensation Plans Proposal." Each of the PPI Incentive Compensation Plans is
attached to this Joint Proxy Statement/Prospectus as Appendices B, C, D and E.
The outstanding HealthFirst Class A Shares and the outstanding shares of
Corvallis Clinic Class A Stock, Corvallis Clinic Class B Stock and Medford
Clinic Common Stock (collectively, the "Voting Shares") represented by properly
executed proxies will be voted at the appropriate Special Meeting in accordance
with the directions on the proxies, unless such proxies previously have been
revoked. If no direction is indicated, the Voting Shares will be voted FOR
approval of the HealthFirst Reorganization Proposal, the Corvallis Clinic
Reorganization Proposal or the Medford Clinic Reorganization Proposal, as the
case may be, FOR the Merger Proposal and FOR approval of the PPI Incentive
Compensation Plans Proposal. Any HealthFirst, Corvallis Clinic or Medford Clinic
shareholder giving a proxy may revoke his or her proxy at any time before its
exercise at the appropriate Special Meeting by (i) giving written notice of such
revocation to the Secretary of HealthFirst, Corvallis Clinic or Medford Clinic,
as the case may be, (ii) signing and delivering to such Secretary a proxy
bearing a later date or (iii) attending the appropriate Special Meeting and
voting in person. A valid proxy will not be revoked if a shareholder attends a
Special Meeting but does not vote. See "The Special Meetings--Proxies: Voting
and Revocation".
RECORD DATE AND VOTE REQUIRED
The record date for shareholders of HealthFirst entitled to vote at the
HealthFirst Special Meeting is November 8, 1996. The record date for
shareholders of Corvallis Clinic entitled to vote at the Corvallis Clinic
Special Meeting is November 8, 1996. The record date for shareholders of Medford
Clinic entitled to vote at the Medford Clinic Special Meeting is November 8,
1996.
The HealthFirst Reorganization Proposal, the Merger Proposal and the PPI
Incentive Compensation Plans Proposal must be approved by a majority of the
outstanding HealthFirst Class A Shares. The Corvallis Clinic Reorganization
Proposal, the Merger Proposal and the PPI Incentive Compensation Plans Proposal
must be approved by holders of two-thirds of the outstanding shares of each of
Corvallis Clinic Class A Stock and Corvallis Clinic Class B Stock, in each case
as a voting group. The Medford Clinic Reorganization Proposal, the Merger
Proposal and the PPI Incentive Compensation Plans Proposal must be approved by a
majority of the outstanding shares of Medford Clinic Common Stock. In each case,
abstentions will have the same effect as a vote against the Proposals.
5
<PAGE>
If the shareholders of any Company fail to approve by the requisite
percentage any of the HealthFirst Reorganization Proposal, the Corvallis Clinic
Reorganization Proposal, the Medford Clinic Reorganization Proposal or the
Merger Proposal, the Merger will not be consummated.
THE MERGER
The Reorganization and Merger Agreement contemplates that each of the
Companies will merge with and into PPI, provided that all conditions to the
consummation of the Merger are satisfied or waived. Shareholders of each of
HealthFirst, Corvallis Clinic and Medford Clinic (other than shareholders who
take required actions to properly assert their dissenters' rights under the
Oregon Business Corporation Act) will receive shares of PPI Class A Common Stock
in exchange for their shares of HealthFirst Class A Shares, Corvallis Clinic
Class A Stock, Corvallis Clinic Class B Stock, Corvallis Clinic Class C Stock
and Medford Common Stock, as applicable, as follows:
- Each outstanding HealthFirst Class A Share will be converted into the
right to receive 308 shares of PPI Class A Common Stock.
- Each outstanding share of Corvallis Clinic Class A Stock will be converted
into the right to receive 1,454 shares of PPI Class A Common Stock.
- Each outstanding share of Corvallis Clinic Class B Stock will be converted
into the right to receive 163 shares of PPI Class A Common Stock.
- Each outstanding share of Corvallis Clinic Class C Stock will be converted
into the right to receive 6 shares of PPI Class A Common Stock.
- Each outstanding share of Medford Clinic Common Stock will be converted
into the right to receive 27,474 shares of PPI Class A Common Stock.
The exchange ratios set forth above were determined on the basis of the
number of full-time-equivalent physicians and other specified providers ("FTE")
of each Company as of October 1, 1996, with full- or part-time equivalence
determined based on a work-week of at least four full-working days for full-time
equivalence. A specified number of shares of PPI Class A Common Stock, equal to
the product of 27,000 multiplied by the number of FTE of each Company ("Merger
Shares"), was allocated to each of the Companies. The exchange ratio for each
share of capital stock of each of the Companies was then computed by dividing
the total outstanding number of shares of capital stock of such Company into the
number of Merger Shares.
The respective boards of directors of the Companies also determined that the
FTE of each Company was a fair and reasonable method of determining the value of
each Company and thus the consideration in the Merger. See "-- Recommendations
of the Boards of Directors."
It is contemplated that the Merger will occur as soon as practicable after
each of the Companies' shareholders approve the PC Reorganization Transactions,
the Merger Transactions and the PPI Incentive Compensation Plans at their
respective Special Meetings.
COMPARISON OF SHARES AND OPTIONS
Each Company is a privately-held professional corporation. No trading market
currently exists for their shares.
The following table sets forth for each Company the number of FTE, the
aggregate number of shares of PPI Class A Common Stock allocated on an aggregate
basis to the shareholders of such Company at the
6
<PAGE>
Effective Time and the applicable exchange ratio for the underlying capital
stock of such Company in the Merger.
CAPITAL STOCK EXCHANGE RATIO TABLE
<TABLE>
<CAPTION>
E
C --------------
---------- D MERGER
A TOTAL PPI ---------------- EXCHANGE RATIO
------------- B COMMON OUTSTANDING (ROUNDED TO
PROVIDER FTE --------------- STOCK SHARES NEAREST WHOLE)
AS OF PPI COMMON ALLOCATION OF EACH (C DIVIDED BY
11/1/96) STOCK PER FTE (A X B) CLINIC D)
------------- --------------- ---------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
HEALTHFIRST........................ 105 27,000 2,835,000
Class A.......................... 9,200 308.1
Percent of Total................. 43.61% 43.61%
CORVALLIS.......................... 77.75 27,000 2,099,250
Class A.......................... 63 1,454:1(1)
Class B.......................... 12,035 163:1(2)
Class C.......................... 7,900 6:1(1)
Percent of Total................. 32.29% 32.29%
MEDFORD............................ 58 27,000 1,566,000
Common........................... 57 27,474:1
Percent of Total................. 24.09% 24.09%
TOTAL: 240.75 27,000 6,500,250
</TABLE>
- ------------------------
(1) The number of shares of PPI Class A Common Stock into which each share of
Corvallis Clinic Class A Stock and the number of shares of PPI Class A
Common Stock into which shares of Corvallis Clinic Class C Stock will be
converted pursuant to the Merger represents those numbers having aggregate
values of $23,000 and $100, respectively, with the value of PPI Class A
Common Stock being based on a valuation of the Companies as a combined
entity, assuming such combination as of June 30, 1996 prepared by American
Appraisal Associates, Inc. (an independent valuation firm selected by
Corvallis Clinic pursuant to the Reorganization and Merger Agreement).
(2) The number of shares of PPI Class A Common Stock into which each share of
Corvallis Clinic Class B Stock will be converted pursuant to the Merger is
equal to the quotient obtained by dividing (a) 12,035 (the number of all
issued and outstanding shares of Corvallis Clinic Class B Stock at the
Effective Time) into (b) 1,960,248 (the excess of (i) 2,099,250, the
aggregate number of shares of PPI Class A Common Stock which Corvallis
Clinic shareholders will be entitled to receive as consideration in the
Merger, over (ii) 139,002, the aggregate number of shares of PPI Class A
Common Stock into which all of the issued and outstanding shares of
Corvallis Clinic Class A Stock and Corvallis Clinic Class C Stock will be
converted under (1) above).
The Reorganization and Merger Agreement contemplates that each of the
Companies will, prior to the Merger, adopt a stock option plan for certain of
its employees and issue options to purchase Series 1 of HealthFirst Class A
Shares, Corvallis Clinic Class B Stock or Medford Clinic Common Stock, as the
case may be. These options will be converted into the right to acquire, on the
same terms and conditions, shares of PPI Class A Common Stock with the number of
shares and exercise price applicable to such option adjusted on the basis of
applicable exchange ratios for the underlying HealthFirst Class A Shares,
Corvallis Clinic Class B Stock or Medford Clinic Common Stock, as the case may
be.
7
<PAGE>
The following table sets forth for each Company the number of FTE, the
number of options to purchase shares of PPI Class A Common Stock allocated on an
aggregate basis to the shareholders of such Company and the applicable exchange
ratio for such options in the Merger.
STOCK OPTION EXCHANGE RATIO TABLE
<TABLE>
<CAPTION>
E
D -----------
B C -------------- OUTSTANDING
A --------------- ---------- MERGER OPTIONS OF
------------- OPTIONS TO TOTAL EXCHANGE EACH CLINIC
PROVIDER FTE PURCHASE PPI OPTIONS RATIO (ROUNDED (C
AS OF COMMON STOCK ALLOCATION TO NEAREST DIVIDED BY
11/1/96) PER FTE (A X B) WHOLE) D)
------------- --------------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
HEALTHFIRST............................. 105 5,000 525,000
Class A............................... 308:1 1,704.5
Percent of Total...................... 43.61% 43.61%
CORVALLIS............................... 77.75 5,000 388,750
Class B............................... 163:1 2,385.0
Percent of Total...................... 32.29% 32.29%
MEDFORD................................. 58 5,000 290,000
Common................................ 27,474:1 10.6
Percent of Total...................... 24.09% 24.09%
TOTAL: 240.75 5,000 1,203,750
</TABLE>
THE PC REORGANIZATION TRANSACTIONS
The purpose of the PC Reorganization Transactions is to comply with the
requirements of the Oregon Professional Corporation Act which prohibit a
professional corporation from merging into a business corporation and which
restrict non-physician ownership or control of a medical practice. The
incorporation of each of HealthFirst New PC, Corvallis Clinic New PC and Medford
Clinic New PC allows the respective shareholders of the Companies to continue as
shareholders of a professional corporation. The conversion of each of the
Companies from a professional corporation to a business corporation enables the
Companies to merge with and into PPI.
The Reorganization and Merger Agreement contemplates that each of the
Companies will, prior to the Merger, incorporate, as a wholly-owned subsidiary
thereof, as a New PC. Each of the Companies will then transfer certain assets
integral to its provider professional services business to such New PC and cause
such New PC to assume liabilities of such Company relating to such transferred
assets. After such transfer of assets, each of the Companies will make a
distribution under which the then-current shareholders of such Company will
receive all of the issued and outstanding shares of such New PC, allocated on a
pro rata basis in accordance with the fair market value of each such
shareholder's then-current equity interest in such Company. The shareholders of
Corvallis Clinic may instead receive such shares on a one-to-one basis, whereby
each shareholder will receive in Corvallis Clinic New PC the same number of
shares, with the same designation of class of shares, as such shareholder owns
in Corvallis Clinic.
Each of the Companies will then convert from an Oregon professional
corporation to an Oregon business corporation by filing Restated Articles of
Incorporation, together with the required fee, with the Secretary of State of
the State of Oregon in accordance with Oregon Law and enter into a New PC
Management Agreement with each such Company's New PC. After the Merger, by
operation of law, such New PC Management Agreement will be assigned by such
Company to PPI pursuant to which, in exchange for the management services
provided by PPI to such Company's New PC, PPI will be entitled to receive (a)
reimbursement of all Manager's Expenses (as such term is hereinafter defined)
incurred by PPI plus (b) 16% of the Distributable Profit Amount of such
Company's New PC. "Distributable Profit Amount" is defined as (i) gross
revenues, booked on an accrual basis and subtracting specified contractual
allowances
8
<PAGE>
and bad debt, received by PPI or such New PC relating to services provided by
such New PC, less (ii) Manager's Expenses. Each Company's New PC will be
responsible for provider compensation and benefits. The term "Manager's
Expenses" is defined in the New PC Management Agreement to mean the actual cost
of all operating and non-operating expenses incurred by PPI in the operation of
a New PC's medical offices. Any allocation of costs (as opposed to a
pass-through of actual direct costs incurred by PPI in connection with the
operation of such New PC's medical offices for which PPI shall be reimbursed in
full) by PPI to such New PC shall require approval of the joint management board
(composed of PPI and such New PC representatives) of the proposed cost
allocation for a defined period of time prior to implementation of the function
for which a cost allocation is proposed. "Manager's Expenses" expressly will not
include any corporate overhead charges of PPI (other than as expressly agreed to
in the New PC Management Agreement), federal or state income taxes of PPI or
such New PC, any expenses which are expressly designated as obligations to be
assumed solely by PPI, and any amortization expense resulting from the
amortization of costs in connection with the execution of the New PC Management
Agreement.
Upon consummation of the PC Reorganization Transactions, the new
organizational structure of each New PC will be as follows:
[CHART]
TERMS OF THE REORGANIZATION AND MERGER
The Reorganization and Merger Agreement was entered into by and among PPI,
HealthFirst, Corvallis Clinic and Medford Clinic on July 29, 1996, following
approval by the boards of directors of each party thereto, and subsequently
amended and restated on September 19, 1996 and further amended on November 4,
1996. Pursuant to the terms of the Reorganization and Merger Agreement,
HealthFirst, Corvallis Clinic and Medford Clinic will effectuate the HealthFirst
Reorganization Transactions, the Corvallis Clinic Reorganization Transactions
and the Medford Clinic Reorganization Transactions, as the case may be, and will
merge with and into PPI, all in accordance with the terms and conditions set
forth in the Reorganization and Merger Agreement.
GOVERNMENT AND REGULATORY APPROVALS
PPI, HealthFirst, Corvallis Clinic and Medford Clinic are aware of no
governmental or regulatory approvals required for the consummation of the
Merger, other than compliance with federal and applicable state securities and
corporate laws, including the declaration of the SEC of the effectiveness of the
Registration Statement relating to this Joint Proxy Statement/Prospectus and the
required transfer of or amendment to licenses and permits of HealthFirst,
Corvallis Clinic or Medford Clinic, as the case may be.
9
<PAGE>
CLOSING AND EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the completion of the filing of a
properly executed Certificate of Merger with the Secretary of State of the State
of Delaware reflecting the Merger, which filings will be made after satisfaction
of certain conditions set forth in the Reorganization and Merger Agreement. See
"Terms of the Reorganization and Merger -- Conditions of the Reorganization and
Merger Agreement".
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Due to the benefits to be received by certain individuals who are employees
or directors of HealthFirst, Corvallis Clinic or Medford Clinic in connection
with the Merger, as described below, the interests of these individuals may be
different from the interests of shareholders of the Companies generally.
Shareholders should consider such persons' interests in the Merger in connection
with any such person's recommendation of the Merger.
Upon the Effective Time, it is anticipated that (a) the current directors
and executive officers of HealthFirst will beneficially own approximately four
percent of the outstanding shares of PPI Class A Common Stock, (b) the current
directors and executive officers of Corvallis Clinic will beneficially own
approximately two percent of the outstanding shares of PPI Class A Common Stock
and (c) the current directors and executive officers of Medford Clinic will
beneficially own approximately three percent of the outstanding shares of PPI
Class A Common Stock.
In anticipation of the consummation of the Merger, each of David M.
Goldberg, M.H.A., Tim E. Dupell, C.P.A., Michael F. Bonazzola, M.D., Jerald W.
Erstgaard, David L. Kobriger and Jon D. Ness has executed an employment
agreement with PPI. The employment agreements of Mr. Goldberg and Mr. Dupell are
currently effective; the employment agreements of Dr. Bonazzola, Mr. Erstgaard,
Mr. Kobriger and Mr. Ness become effective at the Effective Time. The employment
agreements for the respective executive officers also provide as follows:
1. Mr. Goldberg is employed as President and Chief Executive Officer of PPI
for a term of three years. From July 1, 1996 until the Effective Time, Mr.
Goldberg will be paid a base salary at an annual rate of $300,000; from and
after the Effective Time, he will be paid a base salary at an annual rate of
$225,000 and an option to purchase 50,000 shares of PPI Class A Common Stock.
Pursuant to his employment agreement, on October 30, 1996, Mr. Goldberg received
a restricted stock award of 27,000 shares of PPI Class A Common Stock. In the
event Mr. Goldberg's employment is terminated without cause, he shall receive
his base salary and medical, health and accident and disability insurance for a
term of 12 months after the date of such termination. In the event the Merger
fails to occur on or before January 31, 1997, Mr. Goldberg would be entitled to
receive, among other things, severance compensation in the amount of $300,000
and health and disability insurance coverage for 12 months. The obligations of
PPI under the employment agreement with Mr. Goldberg are guaranteed by the
Companies.
2. Mr. Dupell, is employed as Senior Vice President and Chief Financial
Officer of PPI for a term of three years. From July 29, 1996 until the Effective
Time, Mr. Dupell will be paid a base salary at an annual rate of $150,000; at
the Effective Time, Mr. Dupell will receive an option to purchase 35,000 shares
of PPI Class A Common Stock. Pursuant to his employment agreement, on October
30, 1996 Mr. Dupell received a restricted stock award for 27,000 shares of PPI
Class A Common Stock. In the event Mr. Dupell's employment is terminated without
cause, he shall receive his base salary and medical, health and accident and
disability insurance for a term of 12 months after the date of such termination.
In the event the Merger fails to occur on or before January 31, 1997, Mr. Dupell
would be entitled to receive, among other things, severance compensation in the
amount of $150,000 and health and disability insurance coverage for 12 months.
The obligations of PPI under the employment agreement of Mr. Dupell are
guaranteed by the Companies.
10
<PAGE>
3. Dr. Bonazzola, is employed as Senior Vice President and Chief Medical
Officer of PPI for a term of three years. Commencing at the Effective Time, Dr.
Bonazzola will be paid a base salary at an annual rate of $190,000, and receive
a bonus award of $25,000 and an option to purchase 35,000 shares of PPI Class A
Common Stock. In the event Dr. Bonazzola's employment is terminated without
cause, he shall receive his base salary and medical, health and accident and
disability insurance for a term of 12 months after the date of such termination.
In the event the Merger fails to occur on or before January 31, 1997, Dr.
Bonazzola would be entitled to receive, among other things, severance
compensation in the amount of $190,000 and health and disability insurance
coverage for 12 months. The obligations of PPI under the employment agreement of
Dr. Bonazzola are guaranteed by the Companies.
4. Each of Messrs. Ness and Kobriger is employed as a Senior Vice President
of PPI for a term of three years. Commencing at the Effective Time, each of
Messrs. Ness and Kobriger will be paid a base salary at an annual rate of
$175,000 and receive an option to purchase 35,000 shares of PPI Class A Common
Stock. Pursuant to their respective employment agreements, each of Messrs. Ness
and Kobriger received on October 30, 1996 a restricted stock award for 27,000
shares of PPI Class A Common Stock. In the event Mr. Ness or Mr. Kobriger's
employment agreement is terminated without cause, such executive shall be
entitled to receive his base salary and medical, health and accident and
disability insurance for a term of 12 months after the date of such termination.
Neither Mr. Ness nor Mr. Kobriger is entitled to any severance compensation in
the event the Merger fails to occur.
5. Mr. Erstgaard is employed as Senior Vice President of PPI for a term of
three years. Commencing at the Effective Time, Mr. Erstgaard will be paid a base
salary at an annual rate of $175,000 and receive an option to purchase 35,000
shares of PPI Class A Common Stock. In the event Mr. Erstgaard is terminated
without cause, he shall be entitled to receive his base salary and medical,
health and accident and disability insurance for a term of 12 months after the
date of such termination. Mr. Erstgaard is not entitled to any severance
compensation in the event the Merger fails to occur.
For further details relating to such benefits and compensation, see "The
Merger and Related Transactions--Interests of Certain Persons in the Merger,"
and "Executive Compensation of PPI-- Employment Agreements and Severance
Arrangements".
The current employment agreements of such executive officers with the
Companies provide no severance or termination payments upon termination of
employment either in anticipation of the consummation of the Merger, or upon
consummation of the Merger.
POTENTIAL ADVERSE CONSEQUENCES TO SHAREHOLDERS
Shareholders of each Company may be adversely affected due to material
differences between the provisions of the articles of incorporation and bylaws
of such Company and the Certificate of Incorporation (the "PPI Certificate") and
the Bylaws of PPI (the "PPI Bylaws"). Such material differences include the
rights of holders of Old PC Shares, on the one hand, and the holders of PPI
Class A Common Stock, on the other hand. In addition, such material differences
include provisions in the PPI Certificate and the PPI Bylaws that may have the
effect of delaying or preventing a change of control, including (a) a two-thirds
vote requirement (i) for removal of directors, which may be effected only for
cause and (ii) for amending certain provisions of the PPI Certificate and the
PPI Bylaws, (b) prohibition against unanimous written consent of shareholders,
and (c) a more restrictive requirement with respect to calling special meetings
of shareholders.
In addition, certain provisions of the PPI Certificate, the PPI Bylaws and
Delaware law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of PPI and limit the price that
certain investors might be willing to pay in the future for shares of PPI Class
A Common Stock. These provisions include a staggered board of directors and
authority granted to the PPI Board to authorize the issuance, without further
shareholder approval, of preferred stock with rights and privileges senior to
PPI Common Stock. PPI also is subject to Section 203 of the General Corporation
11
<PAGE>
Law of the State of Delaware ("DGCL"), which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" (the owner of 15% or
more of the then outstanding shares of PPI Common Stock) for a period of three
years following the date that such stockholder became an interested stockholder.
See "The Merger and Related Transactions--Rights of Security Holders."
CONDITIONS OF THE PC REORGANIZATION TRANSACTIONS AND THE MERGER
Conditions to the closing of the Reorganization and Merger Agreement
include, but are not limited to, the following:
1. The requisite number of shareholders of each of HealthFirst, Corvallis
Clinic and Medford Clinic shall have approved the Reorganization and
Merger Agreement and all of the transactions contemplated thereby;
2. The SEC shall have declared the Registration Statement effective;
3. There shall be issued no preliminary or permanent injunction or other
order by any federal, state or foreign court which prohibits the
consummation of the transactions;
4. PPI and the Companies shall have taken all necessary action to adopt the
PPI Incentive Compensation Plans;
5. PPI shall have adopted a rights agreement for a dividend distribution of
one right to purchase a certain number of shares of a class of preferred
stock of PPI for each share of PPI Common Stock;
6. PPI and each of the Companies shall have received the opinion of
counsel, with such assumptions and qualifications as are reasonably
satisfactory to the Companies, based on certificates of officers of the
Companies as requested by counsel, to the effect that the Merger will,
more likely than not, be treated for federal income tax purposes as a
tax-free transaction;
7. Each New PC shall have obtained all material approvals, licenses,
provider numbers and other items to operate and receive reimbursement
after the effectiveness of the Merger;
8. The respective Restated Articles of Incorporation of the Companies shall
have been made effective and the PC Reorganization Transactions shall
have been consummated in accordance with Oregon Law;
9. Each Company shall have entered into a New PC Management Agreement with
such Company's New PC; and
10. The aggregate number of shares held by the shareholders of any Company
dissenting from the Merger shall not exceed 15% of all issued and
outstanding capital stock of such Company.
TERMINATION OF THE PC REORGANIZATION TRANSACTIONS AND THE MERGER
The Reorganization and Merger Agreement may be terminated prior to the
Effective Time upon certain occurrences, including, without limitation, the
following:
1. Written consent of all of the parties;
2. An uncured or uncurable material breach;
3. A determination by the Board of Directors of any party not to recommend
the Reorganization and Merger Agreement, the HealthFirst Reorganization
Proposal, the Corvallis Clinic Reorganization Proposal or the Medford
Clinic Reorganization Proposal, as the case may be, or the Merger
Proposal or withdrawal of a recommendation or resolution to do any of the
foregoing;
12
<PAGE>
4. Any court order, decree or ruling or other action restraining or
prohibiting any of the HealthFirst Reorganization Transactions, the
Corvallis Clinic Reorganization Transactions or the Medford Clinic
Reorganization Transactions, or the Merger;
5. Written notice by any party to the other parties if approval of the
shareholders of such party shall not have been obtained as required; and
6. The Effective Time has not occurred on or before January 31, 1997.
CLOSING AND EFFECTIVE TIME OF THE PC REORGANIZATION TRANSACTIONS AND THE MERGER
The Effective Time will occur upon the completion of the filing of a
properly executed Certificate of Merger with the Secretary of State of the State
of Delaware reflecting the merger of the Companies with and into PPI, which
filing will be made after satisfaction of certain conditions set forth in the
Reorganization and Merger Agreement, including approval by the shareholders of
each Company. See "The Merger and Related Transactions--Closing and Effective
Time of the Merger" below.
EFFECT OF MERGER ON NEW OPTIONS
None of the Companies currently has any options outstanding. The
Reorganization and Merger Agreement contemplates that each of the Companies
will, prior to the consummation of the Merger, adopt a stock option plan for
certain of its employees and issue options to purchase HealthFirst Series 1
Stock, Corvallis Clinic Class B Stock and Medford Clinic Common Stock
(collectively, the "New Options"). New Options will be assumed by PPI and
converted into rights to a number of shares of PPI Class A Common Stock equal to
the number of shares subject to the New Options multiplied by the applicable
exchange ratio for the underlying shares of HealthFirst Class A Shares,
Corvallis Clinic Class B Stock or Medford Clinic Common Stock. The exercise
price per share of an option to buy PPI Class A Common Stock will equal the
former exercise price per share under the New Options divided by the applicable
exchange ratio.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The HealthFirst Board has unanimously approved the HealthFirst
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal and determined that the Merger is fair to, and in the best
interests of, the shareholders of HealthFirst.
The material factors considered by the HealthFirst Board in reaching its
decision were the following: (i) the ability to realize cost savings; (ii) a
significant base of geography and equity that would result in an enhanced
ability to obtain capital; (iii) the broader geographic coverage and improved
access for patients of HMOs and larger purchaser groups offered by PPI; (iv) the
ability to provide better clinical care for patients; (v) the ability to
transfer employees among locations without losing seniority or benefits; (vi)
fair merger consideration to the shareholders of HealthFirst; and (vii) the
exchange of HealthFirst shares for shares of PPI Class A Common Stock on a
tax-free basis. Such factors outweighed the concerns over (a) the recent
operating losses of Corvallis Clinic; (b) the fear that the formation of PPI
would attract greater competition from other physician practice management
companies and hospitals in the same service areas and (c) uncertainty regarding
the ability of the PPI management team to manage effectively. ACCORDINGLY, THE
HEALTHFIRST BOARD UNANIMOUSLY RECOMMENDS APPROVAL OF THE HEALTHFIRST
REORGANIZATION PROPOSAL, THE MERGER PROPOSAL AND THE PPI INCENTIVE COMPENSATION
PLANS PROPOSAL BY ITS SHAREHOLDERS.
The Corvallis Clinic Board has unanimously approved the Corvallis Clinic
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal and determined that the Merger is fair to, and in the best
interests of, the shareholders of Corvallis Clinic.
The material factors considered by the Corvallis Clinic Board in reaching
its decision were the following: (i) a significantly better chance of acquiring
capital for the future through PPI than as Corvallis
13
<PAGE>
Clinic alone; (ii) the ability to share strengths and management expertise with
the other Companies; (iii) the ability to transfer employees among offices
without losing seniority or benefits; (iv) significantly better merger
consideration to the shareholders of Corvallis Clinic than any other
alternative; (v) the exchange of Corvallis Clinic shares for shares of PPI Class
A Common Stock on a tax-free basis; (vi) fairness of Merger consideration to the
shareholders of Corvallis Clinic and (vii) the exchange of Corvallis Clinic
shares for shares of PPI Class A Common Stock on a tax-free basis. Potential
negative factors considered by the Corvallis Clinic Board included (a)
apprehension that acquisitions by PPI in surrounding service areas could limit
Corvallis Clinic's growth, (b) the impact of losing the services of certain key
personnel to PPI. Such considerations were outweighed by the positive factors.
ACCORDINGLY, THE CORVALLIS CLINIC BOARD UNANIMOUSLY RECOMMENDS APPROVAL OF THE
CORVALLIS CLINIC REORGANIZATION PROPOSAL, THE MERGER PROPOSAL AND THE PPI
INCENTIVE COMPENSATION PLANS PROPOSAL BY ITS SHAREHOLDERS.
The Medford Clinic Board has unanimously approved the Medford Clinic
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal and determined that the Merger is fair to, and in the best
interests of, the shareholders of Medford Clinic.
The material factors considered by the Medford Clinic Board in reaching its
decision were the following: (i) the need for additional capital to fund the
expansion of both the provider base and the supporting facilities; (ii)
economies of scale in sharing costs and benefits of infrastructure; (iii) solid
geographic coverage with HealthFirst and Corvallis Clinic; (iv) a potential
opportunity to access public capital and other sources; (v) fairness of Merger
consideration to the shareholders of Medford Clinic; and (vi) the exchange of
Medford Clinic shares for shares of PPI Class A Common Stock on a tax-free
basis. Among the concerns reviewed by the Medford Clinic Board were (a) the
recent operating losses incurred by Corvallis Clinic and (b) potential
disruption of Medford Clinic's relationships with payors and hospitals due to
possible actions by PPI. The Medford Clinic Board determined that such concerns
were far outweighed by the advantages enumerated in (i) through (vi).
ACCORDINGLY, THE MEDFORD CLINIC BOARD UNANIMOUSLY RECOMMENDS APPROVAL OF THE
MEDFORD CLINIC REORGANIZATION PROPOSAL, THE MERGER PROPOSAL AND THE PPI
INCENTIVE COMPENSATION PLANS PROPOSAL BY ITS SHAREHOLDERS.
The respective boards of directors of each of the Companies also determined
that the respective FTE of each Company represented a fair and reasonable basis
for allocation of shares of PPI Class A Common Stock to be issued by PPI as
consideration in the Merger. Each such board of directors believed that the
relative economic value of each of the Companies derives from the capacity of
such Company to generate revenues for the combined PPI entity. Each Company's
board of directors determined that such capacity was best measured by reference
to the relative numbers of FTE providers employed thereby. The provisions of the
Reorganization and Merger Agreement permitting a distribution to shareholders by
a Company if such Company's net equity per FTE exceeded that of either of the
other Companies by a specified threshold amount was also considered significant.
FEDERAL INCOME TAX CONSIDERATIONS
PC REORGANIZATIONS.
The PC Reorganization Transactions may be treated as taxable distributions,
with the effect of the creation of taxable income at both the Company and the
shareholder levels. The respective boards of directors of the Companies,
however, did not require opinions from legal counsel with respect to the tax
consequences of the PC Reorganization Transactions. It is the belief of the
respective boards of directors of the Companies that, based on the terms and
conditions of the New PC Management Agreement between PPI and each New PC and
the limited nature of each New PC's business, each such New PC would have no
more than a nominal value and, therefore, that the New PC Distribution would not
involve material tax exposure to its shareholders.
14
<PAGE>
MERGER.
Counsel to PPI and the Companies has, upon the basis of certain assumed and
described facts, rendered an opinion that, for federal income tax purposes, it
is more likely than not that the Merger will constitute a tax-free transaction.
As a tax-free transaction, the Merger would result in the following general
federal income tax consequences: (i) no gain or loss would be recognized by the
shareholders of each of the Companies who exchange their Old PC Shares for PPI
Class A Common Stock pursuant to the Merger, (ii) the aggregate tax basis of PPI
Class A Common Stock received in the Merger would equal the aggregate tax basis
of the Old PC Shares exchanged therefor, (iii) no gain or loss would be
recognized by each of the Companies in connection with the Merger and (iv)
provided that the Old PC Shares are held as a capital asset at the Effective
Time, the holding period of PPI Class A Common Stock would include the holding
period of such Old PC Shares. See "Terms of the Reorganization and
Merger--Federal Income Tax Considerations."
ACCOUNTING TREATMENT
Staff Accounting Bulletin ("SAB") 48 indicates that when a company acquires
assets from promoters and shareholders in exchange for stock just prior to or at
the time of its first public offering, such assets should generally be recorded
at the cost to any such promoter or shareholder. Each of the Companies are
involved as promoters of the Merger and the related first-time public
registration of PPI capital stock. Accordingly, the assets and liabilities to be
transferred from the Companies to PPI in the Merger Transactions will be
recorded on the balance sheet of PPI in the same amounts as reflected in the
balance sheets of the Companies at the Effective Time. See "Terms of the
Reorganization and Merger-- Accounting Treatment."
As reflected in the "Unaudited Pro Forma Financial Statements of PPI",
substantially all assets and liabilities reflected on the historic balance
sheets of the Companies are expected to be transferred to PPI. In addition, it
is expected that certain of the intangible assets, contractual commitments and
contingent liabilities of the Companies, which are not set forth on the
Companies' respective balance sheets, would also be transferred to PPI in the
Merger.
DISSENTERS' RIGHTS REGARDING THE MERGER
Holders of record of HealthFirst Class A Shares, Corvallis Clinic Class A
Stock, Corvallis Clinic Class B Stock or Medford Clinic Common Stock who comply
with the applicable procedures under Sections 60.551 through 60.594 of the
Oregon Business Corporation Act will be entitled to receive the fair value of
shares held by such dissenting shareholders. The term "fair value" means the
value of the shares immediately before the consummation of the Merger, excluding
any element of value arising from the consummation or the expectation of the
Merger. Dissenting shareholders have certain rights of appraisal. A dissenting
shareholder must follow the steps specified by Oregon law properly and take
required actions to assert such dissenting shareholder's dissenters' rights.
Dissenting shareholders are urged to consult legal counsel with respect to
dissenters' rights under the Oregon Business Corporation Act. See "Terms of the
Reorganization and Merger--Dissenter's Rights Regarding the Merger;" "The
HealthFirst Shareholder Meeting;" "The Corvallis Clinic Shareholder Meeting;"
and the "Medford Clinic Shareholder Meeting."
EXCHANGE/ISSUANCE OF STOCK CERTIFICATES IN THE MERGER
No later than the Effective Time, PPI shall make available, and each holder
of the Old PC Shares will be entitled to receive, upon surrender to PPI of one
or more stock certificates for cancellation, certificates evidencing the number
of shares of PPI Class A Common Stock into which such Old PC Shares are
converted in the Merger. As soon as reasonably practicable after the Effective
Time, PPI shall mail to each holder of record of a certificate or certificates
evidencing outstanding Old PC Shares which were converted into shares of PPI
Class A Common Stock documents for effecting the surrender of such certificates
in
15
<PAGE>
exchange for certificates evidencing shares of PPI Class A Common Stock. Cash,
without interest, will be paid in lieu of the issuance of fractional shares of
PPI Class A Common Stock, rounded to the nearest cent, equal to the product of
such fraction multiplied by the fair market value of a share of PPI Class A
Common Stock as of the Effective Time as determined by the PPI Board.
SUMMARY FINANCIAL DATA OF THE COMPANIES AND PPI
The following summary financial information for the Companies does not
represent the financial position of PPI, the entity whose securities are being
exchanged pursuant to the Reorganization and Merger Agreement as described in
this Joint Proxy Statement/Prospectus. The financial information herein is
provided to show the past operations of each of the Companies which will pay
management fees to PPI under the New PC Management Agreements. The summary
financial data for the years ended December 31, 1993, 1994 and 1995 and for the
six-month periods ended June 30, 1995 and 1996, respectively, regarding
HealthFirst and Medford Clinic and for the years ended November 30, 1993, 1994
and 1995 and the seven-month periods ended June 30, 1995 and 1996 regarding
Corvallis Clinic have been derived from, and should be read in conjunction with,
the financial statements and related notes of the individual Companies included
elsewhere in this Joint Proxy Statement/Prospectus.
16
<PAGE>
SUMMARY FINANCIAL DATA OF HEALTHFIRST MEDICAL GROUP, P.C.
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31 ENDED JUNE 30
------------------------------- --------------------
SUMMARY OF OPERATIONS DATA: 1993 1994 1995 1995 1996(1)
- --------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net Revenue Less Provider Compensation and Benefits...... $ 18,120 $ 23,901 $ 28,122 $ 13,317 $ 16,280
Operating Expenses....................................... 15,963 20,648 27,593 12,202 20,248
Net Income (Loss)........................................ 1,314 1,938 292 642 (2,545)(2)
<CAPTION>
AS OF DECEMBER 31 AS OF JUNE 30
------------------------------- --------------------
BALANCE SHEET DATA: 1993 1994 1995 1995 1996(1)
- --------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Working Capital (Deficit)................................ 1,882 1,961 (1,507) 527 (2,542)
Total Assets............................................. 11,742 16,848 21,075 16,136 32,459
Long Term Debt, net...................................... 2,223 1,731 3,711 2,357 4,160
Capital Leases and Direct Financing Obligations,
net(3)................................................. -- -- -- -- 4,471
Shareholders' Equity..................................... 5,344 7,253 7,597 7,965 5,047
<CAPTION>
AS OF DECEMBER 31 AS OF JUNE 30
------------------------------- --------------------
SUMMARY OF OPERATIONS HISTORY: 1993 1994 1995 1995 1996(1)
- --------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Number of:
Providers................................................ 60 72 105 81 136
Clinical Sites........................................... 5 6 7 6 11
Capitated Lives.......................................... 16,431 20,186 23,661 22,058 44,268
</TABLE>
- ------------------------
(1) Includes Suburban which was acquired in February, 1996.
(2) Includes a charge of $3.9 million relating to a Deferred Compensation Plan
enacted in 1996 as discussed further in footnote 8 to the financial
statements.
(3) Represents direct financing lease obligations and capital lease obligations
with a related party.
17
<PAGE>
SUMMARY FINANCIAL DATA OF THE CORVALLIS CLINIC, P.C.
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SEVEN MONTHS
FOR THE YEAR ENDED NOVEMBER 30 ENDED JUNE 30
------------------------------- --------------------
SUMMARY OF OPERATIONS DATA: 1993 1994 1995 1995 1996
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net Revenue Less Provider Compensation and Benefits........ $ 22,817 $ 21,615 $ 25,965 $ 14,576 $ 17,687
Operating Expenses......................................... 20,159 22,334 27,779 14,909 17,375
Net Income (Loss).......................................... 1,180 (1,277) (2,107) (743) (70)
<CAPTION>
AS OF NOVEMBER 30 AS OF JUNE 30
------------------------------- --------------------
BALANCE SHEET DATA: 1993 1994 1995 1995 1996
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Working Capital (Deficit).................................. 1,666 (296) (1,251) 1,192 (1,768)
Total Assets............................................... 21,697 21,808 26,549(1) 25,778 26,727
Long Term Debt, net........................................ 8,374 8,310 729(1) 849 554
Capital Leases and Direct Financing Obligations, net....... 245 155 14,258(1) 14,593 14,098
Redeemable Stocks and Accumulated Deficit.................. 5,251 4,329 2,316 3,430 2,022
<CAPTION>
AS OF NOVEMBER 30 AS OF JUNE 30
------------------------------- --------------------
SUMMARY OF OPERATIONS HISTORY: 1993 1994 1995 1995 1996
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Number of:
Providers.................................................. 82 82 95 83 97
Clinical Sites............................................. 7 7 7 7 8
Capitated Lives............................................ 20,031 23,457 28,487 25,359 28,220
</TABLE>
- ------------------------
(1) In June 1995, Corvallis Clinic contributed property and related notes
payable to HealthCare Partners, LLC. Corvallis Clinic recorded a direct
financing lease obligation representing the underlying obligations assumed
by HealthCare Partners, LLC as part of the transaction (see footnote 12 of
the financial statements).
18
<PAGE>
SUMMARY FINANCIAL DATA OF MEDFORD CLINIC, P.C.
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31 ENDED JUNE 30
------------------------------- --------------------
SUMMARY OF OPERATIONS DATA: 1993 1994 1995 1995 1996
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net Revenue Less Provider Compensation and Benefits........ $ 16,065 $ 23,079 $ 27,727 $ 13,577 $ 14,797
Operating Expense.......................................... 15,805 22,457 26,277 12,199 14,087
Net Income................................................. 84 192 652 714 346
<CAPTION>
AS OF DECEMBER 31 AS OF JUNE 30
------------------------------- --------------------
BALANCE SHEET DATA: 1993 1994 1995 1995 1996
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Working Capital............................................ 2,511 2,838 3,053 4,010 2,387
Total Assets............................................... 10,969 14,534 15,245 15,774 15,955
Long Term Debt, net........................................ 3,128 5,459 4,932 5,317 4,437
Shareholders' Equity....................................... 2,322 2,514 3,166 3,197 3,319
<CAPTION>
AS OF DECEMBER 31 AS OF JUNE 30
------------------------------- --------------------
SUMMARY OF OPERATIONS HISTORY: 1993 1994 1995 1995 1996
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Number of:
Providers.................................................. 64 72 71 72 69
Clinical Sites............................................. 7 9 9 9 8
Capitated Lives............................................ 2,531 3,993 7,144 7,050 8,868
</TABLE>
19
<PAGE>
The following summary pro forma financial data of PPI assumes that the PC
Reorganization Transactions and the Merger Transactions described in this Joint
Proxy Statement/Prospectus had previously occurred. The summary of operations
data assumes these transactions had taken place as of January 1, 1993, and the
summary balance sheet data assumes the transactions were completed as of June
30, 1996.
These summary pro forma financial data have been derived from the unaudited
pro forma condensed financial statements of PPI and related assumptions deemed
appropriate by PPI's management as included elsewhere in this Joint Proxy
Statement/Prospectus. This summary financial data may not be indicative of
actual results if the transactions had occurred on the dates indicated or which
may be realized in the future. Neither expected benefits and cost reductions
anticipated from the Merger nor future corporate costs of PPI have been
reflected in such summary pro forma financial data.
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA OF PHYSICIAN PARTNERS, INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31 ENDED JUNE 30
-------------------------------- ------------------
SUMMARY OF OPERATIONS DATA: 1993 1994 1995 1996
- ------------------------------------------------------------ --------- --------- ---------- ------------------
<S> <C> <C> <C> <C>
Net Revenue Less Provider Compensation and Benefits......... $ 67,318 $ 82,793 $ 101,059 $ 56,753
Operating Expenses.......................................... 62,100 76,028 94,419 52,948
Net Income.................................................. 2,621 3,599 3,405 2,005
<CAPTION>
AS OF JUNE 30,
BALANCE SHEET DATA: 1996
- ------------------------------------------------------------ ------------------
<S> <C> <C> <C> <C>
Total Assets................................................ 75,144
Long Term Debt, net......................................... 9,151
Capital Leases and Direct Financing Obligations, net........ 18,568
Stockholders' Equity........................................ 10,391
</TABLE>
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<PAGE>
EQUIVALENT PER COMMON SHARE DATA
The following table sets forth selected historical common share data for
HealthFirst, Corvallis Clinic, Medford Clinic and PPI, pro forma data per share
of PPI Common Stock, and pro forma equivalent data per share for HealthFirst,
Corvallis Clinic, and Medford Clinic. The pro forma equivalent data for
HealthFirst, Corvallis Clinic and Medford Clinic are based on the historical
amounts per share divided by the Conversion Ratio. The data should be read in
conjunction with the financial statements and notes thereto of the respective
entities set forth elsewhere in this Prospectus/Proxy Information Statement, and
such data is qualified in its entirety by reference thereto.
<TABLE>
<CAPTION>
DECEMBER 31(5) JUNE 30(5)
---------------------------------- ------------
HEALTHFIRST 1993 1994 1995 1996
- ----------------------------------------------------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Net Income (Loss) Per Share:
Historical............................................... $ 272.96 $ 384.95 $ 55.05 $ (372.94)(2)
Pro Forma Equivalent..................................... 0.89 1.25 0.18 (1.39)(2)
Book Value Per Share at Period End:(1)
Historical............................................... -- -- -- 630.81(2)
Pro Forma Equivalent..................................... -- -- -- 2.05(2)
CORVALLIS
- -----------------------------------------------------------
Net Income (Loss) Per Share:
Historical............................................... 69.27 (153.08) (239.69) (74.81)
Pro Forma Equivalent..................................... 0.65 (0.63) (1.00) (0.03)
Book Value Per Share at Period End:(1)
Historical............................................... -- -- -- (370.88)
Pro Forma Equivalent..................................... -- -- -- 0.96
MEDFORD
- -----------------------------------------------------------
Net Income (Loss) Per Share:
Historical............................................... 2,078.32 3,695.67 11,535.31 6,183.46
Pro Forma Equivalent..................................... 0.08 0.13 0.42 0.23
Book Value Per Share at Period End:(1)
Historical............................................... -- -- -- 59,274.48
Pro Forma Equivalent..................................... -- -- -- 2.16
PPI
- -----------------------------------------------------------
Net Income (Loss) Per Share:
Historical(3)............................................ -- -- -- (232.21)
Pro Forma Equivalent(4).................................. 0.58 0.70 0.63 0.34
Book Value Per Share at Period End:(1)
Historical(3)............................................ -- -- -- 1.00
Pro Forma Equivalent(4).................................. -- -- -- 1.67
</TABLE>
- ------------------------
(1) Book value per share at period-end is included for period-end date specified
(June 30, 1996) in accordance with SEC rules.
(2) In February, 1996, HealthFirst acquired the stock of Suburban Medical
Clinic. HealthFirst financial information for the six months ended June 30,
1996 includes pro forma combined income data as if this acquisition had
occurred at the beginning of the period. In addition, June 30, 1996 results
include a non-recurring charge of $3.9 million relating to a Deferred
Compensation Plan enacted in 1996 as discussed further in Footnote 8 to the
Financial Statements.
(3) Historical data for PPI represents the period from its inception to the
period end date noted.
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<PAGE>
(4) Pro forma data for PPI is included only for periods specified (year ended
December 31, 1993, 1994 and 1995 and six months ended June 30, 1996) in
accordance with SEC rules.
(5) Corvallis Clinic results are for the seven months ended June 30, 1996 and as
of November 30, 1993, 1994 and 1995. HealthFirst, Medford Clinic and PPI
results are for the six months ended June 30, 1996 and as of December 31,
1993, 1994 and 1995.
The information utilized to determine pro forma equivalent per share data is
summarized below.
<TABLE>
<CAPTION>
1993 1994 1995 JUNE 30, 1996
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
HealthFirst:
Net Income (Loss) $ 1,314,323 $ 1,937,467 $ 291,766 $ (2,913,098)
Net Book Value $ 5,046,528
PPI Equivalent Shares:
Average During Period 1,483,020 1,550,164 1,632,400 2,102,100
End of Period 2,464,000
Corvallis:
Net Income (Loss) $ 1,179,843 $ (1,277,152) $ (2,107,179) $ (70,039)
Net Book Value $ 2,022,077
PPI Equivalent Shares:
Average During Period 1,827,635 2,041,915 2,110,527 2,108,675
End of Period 2,107,393
Medford:
Net Income (Loss) $ 84,172 $ 192,175 $ 651,745 $ 346,274
Net Book Value $ 3,319,371
PPI Equivalent Shares:
Average During Period 1,112,697 1,428,648 1,552,281 1,538,544
End of Period 1,538,544
PPI:
Net Income (Loss) $ 2,621,000 $ 3,599,000 $ 3,405,000 $ 2,005,000
Net Book Value $ 10,391,000
PPI Equivalent Shares:
Average During Period 4,534,352 5,131,727 5,406,208 5,860,319
End of Period 6,220,937
</TABLE>
22
<PAGE>
RISK FACTORS
THE FOLLOWING FACTORS, IN ADDITION TO THOSE DISCUSSED ELSEWHERE IN THIS
JOINT PROXY STATEMENT/PROSPECTUS, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING
THE MERGER AND REORGANIZATION TRANSACTIONS AND THE RECEIPT BY THE COMPANIES'
SHAREHOLDERS OF SHARES OF PPI CLASS A COMMON STOCK IN CONNECTION THEREWITH.
LACK OF COMBINED OPERATING HISTORY; NEW COMPANY
Upon the consummation of the Merger, PPI will be conducting medical group
management operations that previously have been conducted individually by the
respective Companies. Because PPI does not have an independent operating
history, its performance as a newly combined entity is uncertain. There can be
no assurance that PPI will not encounter difficulties in integrating the
operations of the Companies, that the benefits from such integration will be
realized or that the operations, systems and personnel of the Companies will be
compatible. For example, there can be no assurance that PPI will achieve desired
levels of efficiencies and cost savings as a result of the combination of the
Companies. Furthermore, any material delays or unexpected costs incurred in
connection with such integration of management operations also could have a
material adverse effect on PPI.
PPI'S DEPENDENCE ON NEW PCS
PPI's revenue will depend substantially on revenue generated by HealthFirst
New PC, Corvallis Clinic New PC and Medford Clinic New PC and any other medical
groups with which PPI enters into a practice management agreement in the future.
Under the New PC Management Agreements, PPI, as the manager, will provide
management and administrative services, facilities and equipment to each
respective New PC and, as compensation for its services, PPI will be entitled to
receive (a) reimbursement of all Manager's Expenses (as defined below) incurred
by PPI plus (b) 16% of the Distributable Profit Amount of such New PC.
"Distributable Profit Amount" is defined as (i) gross revenues, booked on an
accrual basis and subtracting specified contractual allowances and bad debt,
received by PPI or such New PC relating to services provided by such New PC,
less (ii) Manager's Expenses. Each New PC will be responsible for provider
compensation and benefits. The term "Manager's Expenses" is defined in the New
PC Management Agreement to mean the actual cost of all operating and
non-operating expenses incurred by PPI in the operation of each respective New
PC's medical offices. Any allocation of costs (as opposed to a pass-through of
actual direct costs incurred by PPI, for which PPI shall be reimbursed in full)
by PPI to each respective New PC shall require approval of the joint management
board (composed of PPI and the applicable New PC representatives) of the
proposed cost allocation for a defined period of time prior to implementation of
the function for which a cost allocation is proposed. "Manager's Expenses"
expressly will not include any corporate overhead charges of PPI (other than as
expressly agreed to in the New PC Management Agreement), federal or state income
taxes of PPI or the New PC, any expenses which are expressly designated as
obligations to be assumed solely by PPI, and any amortization expense resulting
from the amortization of costs in connection with the execution of the New PC
Management Agreement. Each New PC Management Agreement will have a term of 40
years. Any loss of revenue by any or all of the New PCs could have a material
adverse effect on PPI. The termination of any of the New PC Management
Agreements also could have a material adverse effect on PPI.
PPI will rely on providers of each New PC to provide sufficient provider
coverage to meet payor requirements. Pursuant to each New PC Management
Agreement, the New PC will be bound to agree to provide all required medical
services under each contract entered into with payors that is approved by the
New PC. There is no assurance that PPI, through the New PCs and any future
PPI-managed medical groups, will be able to arrange for the provision of
sufficient primary care and specialty services to retain existing contracts with
payors, obtain additional contracts with health plans and other payors or be
assigned additional members under existing health plan contracts.
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<PAGE>
Furthermore, there is no assurance that PPI's relations with health plans
and other payors after the consummation of the Merger would be on the same terms
as the relations of the individual Companies with such payors before the Merger.
Likewise, it is possible that relations with patients could be affected by the
Merger, but this is not likely since the New PCs will operate in the same
locations and employ the same providers (other than physicians who exercise
their dissenters' rights and elect to terminate their employment by the
Companies) as the Companies do prior to the effectiveness of the Merger.
If one or more of the New PCs were to suffer significant losses of
physicians to retirement, competitors or for other reasons, the ability of the
New PCs to provide services to assigned patients could be materially affected.
Many of the providers currently employed by the Companies and who will be
employed by the New PCs after the Merger will not be restricted from competing
with the New PCs or PPI after any termination of such providers' employment;
hence, there is no assurance that such providers will not compete with the New
PCs or PPI. Furthermore, there is no assurance that providers who will be
subject to a covenant not to compete by their employing New PC will not relocate
to a different market or that such covenant not to compete will not be subjected
to legal challenge by any such providers. The New PC Management Agreements will
contain provisions that require liquidated damages, payments by the respective
New PCs to PPI if, among other things, a provider of such New PC engages in
certain competitive behavior with the New PC. While each New PC may seek
indemnification from its providers under provisions of their employment
agreements or shareholder agreements, significant provider defections from one
or more of the New PCs and/or competition by such providers against the New PCs
nevertheless could have a material adverse effect on PPI.
RECENT OPERATING LOSSES OF CERTAIN COMPANIES
HealthFirst experienced operating losses for the six months ended June 30,
1996 due to a nonrecurring charge. Corvallis Clinic also incurred operating
losses for the seven months ended June 30, 1996, in addition to operating losses
in each of its previous two fiscal years. There can be no assurance that such
operating losses will not continue.
RISKS RELATED TO CAPITATION
The Companies receive significant revenue related to agreements with HMOs
that typically provide for the payment of fees on a capitated or per member per
month ("PMPM") basis. Under such agreements, the Companies are responsible for
providing or arranging for the provision of covered benefits to the applicable
HMO members. Depending on the amount and cost of services required by members,
PMPM capitation payments may be insufficient to cover such costs of services,
thereby adversely affecting the Companies' operating results. It is sometimes
necessary for the Companies to refer a member to an external provider in order
to arrange for the provision of certain covered services. Each Company has
contracted with a number of providers in order to ensure access to all covered
services. Each Company is obligated to pay the cost of such external services
and carries estimates in its financial statements related to the charges for
these services which have been incurred but not reported ("IBNR") to the
Company. While each Company estimates IBNR amounts based upon historical
experience, there can be no assurance that actual charges incurred will not
exceed such estimates.
REDUCTION IN THIRD-PARTY PAYOR REIMBURSEMENT
The Companies render services to certain patients on a fee-for-service basis
(as opposed to a capitated basis), and bills third-party payors such as private
insurance carriers, Medicare and Medicaid. A significant portion of each
Company's revenue is derived from payments made by these third-party payors.
Such third-party payors are increasingly negotiating for lower prices charged
for medical services with the goal of lowering reimbursement. In addition,
third-party payors can deny reimbursement if they determine that treatment was
not performed in accordance with the cost-effective treatment methods
established by such payors or for other reasons. There can be no assurance that
payment levels under these third-party
24
<PAGE>
contracts will remain at present levels. Any loss of revenue related to
third-party payors could have a material adverse effect on a Company's or PPI's
operating results.
CONCENTRATION OF PAYORS
Six health plans, Secure Horizons, PacifiCare, Blue Cross/Blue Shield of
Oregon, HMO Oregon, Select Care and Oregon Health Plan, accounted for
approximately 37% of the combined net revenue of the Companies for the six
months ended June 30, 1996. The agreements with such health plans are generally
for one-year terms and are thus subject to annual negotiation of rates, covered
benefits and other terms and conditions. In addition, certain of such contracts
with payors are terminable without cause upon prior notice to the Company. There
can be no assurance that such agreements will be renewed or that they will
contain favorable terms. Given this concentration of payors, the loss of any of
the above health plans could have a material adverse effect on PPI.
GROWTH STRATEGY; CAPITAL REQUIREMENTS
The implementation of PPI's growth strategy will depend largely on its
ability to successfully manage the New PCs, under the New PC Management
Agreements, and develop new physician practice management relationships through
acquisitions or other means.
PPI's success in effectively managing the New PCs will be measured, to a
great extent, by its (a) expansion of the number of fee-for-service patients and
prepaid health plan patients, (b) management and control of costs, (c)
realization of economies of scale and (d) effective negotiation of existing and
new health plan contracts. The growth in numbers of fee-for-service and health
plan enrollees using PPI-managed medical groups for their medical care may come
from the development or acquisition of medical groups serving enrollees in
existing or new markets, increased enrollment in health plans currently
contracting with PPI or PPI's managed medical groups or contracts with new
health plans. There can be no assurance that PPI or PPI-managed medical groups
will experience such patient growth. Any failure by PPI to implement
economically feasible management relationships with the New PCs and any other
medical groups it may manage in the future could result in failure to meet such
objectives, and thereby have a material adverse effect on PPI.
In light of its growth strategy, PPI will be subject to various risks
associated with any acquisition-oriented business, including the risk that PPI
will be unable to identify and recruit suitable acquisition candidates in the
future or to successively integrate or manage affiliated medical groups.
Furthermore, there can be no assurance that PPI will be able to maintain and
develop a system of business management to support future growth.
PPI's expansion strategy also requires substantial capital investment.
Capital is needed not only for the acquisition of medical groups, but also for
the effective integration, operation and expansion of acquired medical groups,
information systems maintenance and improvements. Acquired medical groups may
require capital for renovation and expansion. In addition, newly-managed medical
groups may not have been financially successful under prior management, and
there is no assurance that PPI will be able to improve the performance of such
practices to make them profitable.
PPI will operate in a capital intensive industry that faces external
pressures to contain costs and reduce fees. PPI may not be in a position to
maintain adequate liquidity to respond to further expected and unexpected
industry pressures. PPI will depend in large part upon cash flow from operations
to satisfy its financial obligations. If cash provided by operations is not
sufficient, PPI may experience difficulty in meeting its obligations to vendors,
lessors and other creditors, which could have a material adverse effect on PPI.
PPI might raise capital through the incurrence of long-term or short-term
indebtedness (which could result in increased interest and amortization expense
and decreased income to fund future expansion) or the issuance of equity
securities in private or public transactions (which would result in the dilution
25
<PAGE>
of the equity positions of then-current PPI shareholders). There can be no
assurance that acceptable financing for future acquisitions can be obtained.
COMPETITION
In general, both the physician management industry and the health care
provider industry are highly competitive. The Companies individually have
significant experience and generally successful operating histories with respect
to operating their respective medical practices in the greater Portland,
Corvallis and Medford areas. However, the Companies have not previously
operated, as a physician practice management company, on a combined basis in
competition with other entities that provide medical practice management
services. Some established physician practice management companies in Oregon
currently provide some or all of the services that will be provided by PPI.
There is no assurance that PPI will succeed in competing with such competitors.
Competition in the provision of medical services in the markets where PPI
will operate also comes from an increasing variety of providers who are in or
have recently entered the physician provider business (E.G., other group
practices, hospital systems, IPAs, HMOs, and academic medical centers). In the
three markets presently served by the Companies, hospital systems employ primary
care physicians who will compete directly against the PCs. While PPI will seek
to acquire groups with significant market presence, there can be no assurance
that PPI or the New PCs can successfully compete with other provider
competitors.
With respect to physician practice management companies, only two,
MedPartners and American Oncology Resources ("AORI"), have a presence in any of
the markets currently served by the Companies. Both of these publicly traded
PPMs have holdings in the Portland, Oregon market. MedPartners manages a growing
multi-specialty group practice of approximately 70 physicians in the Portland
market. MedPartners has been an aggressive suitor of physician groups in the
Portland market, and recently acquired a group of OB/Gyn physicians who might
have joined HealthFirst. AORI has during the past several years purchased two
high-profile oncology providers in the Portland market which are in direct
competition with HealthFirst's oncology practice. In the larger context of PPI's
regional and national strategic growth plan in the pursuit of quality primary
care-based multi-specialty group practice acquisitions, PPI will directly
compete with public as well as private physician practice management companies.
The can be no assurance that PPI will successfully compete against other PPMs in
such markets.
Finally, there is a risk that PPMs in service areas of the Companies will
intensify their competitive behavior if the Companies merge with and into PPI.
The commencement of business by PPI also could create an impetus to PPMs not
currently in the Companies' markets to enter into such markets.
EXPOSURE TO PROFESSIONAL LIABILITY CLAIMS
Physicians, hospitals and other participants in the health care industry are
subject to an increasing number of lawsuits alleging medical malpractice and
related claims. Many of these lawsuits involve large claims and substantial
defense costs. Although neither PPI nor its employees will practice medicine, it
is subject to the risks associated with medical malpractice and related
litigation. PPI is susceptible to being named in actions involving care rendered
to patients of the New PCs or any future PPI-managed medical groups. Because of
PPI's economic dependence on each of the New PCs actions which threaten the
economic or operational viability of such medical groups similarly threaten PPI.
There can be no assurance that PPI, the New PCs or other PPI-managed practices
will not become involved in such litigation in the future.
Current professional liability coverage of the Companies is as follows:
Corvallis Clinic has coverage of $5 million per claim, with no aggregate
maximum; HealthFirst's coverage with respect to Metropolitan providers is $5
million per claim and its coverage with respect to Suburban providers is $2
million per occurrence and $4 million annually in the aggregate; and Medford
Clinic and each Medford Clinic
26
<PAGE>
provider has coverage of $1 million per occurrence and $3 million annually in
the aggregate. Upon the effectiveness of the Merger, PPI expects that each of
the New PCs will have professional liability coverage of $2 million per claim,
plus $13 million annual aggregate excess professional liability coverage.
Certain types of professional liability risks are not covered by insurance,
and certain claims could exceed available insurance coverage. There can be no
assurance that any professional liability claim or claims will be covered by
insurance or will not exceed the limits of available insurance coverage.
GOVERNMENT REGULATION
Many aspects of the health care industry are presently subject to extensive
federal and state governmental regulation. Applicable federal and state laws
include the fraud and abuse provisions of the federal Medicare and Medicaid
statutes, which prohibit the solicitation, payment, receipt or offering of any
remuneration, either direct or indirect, in exchange for or with the intent to
induce the referral, of Medicare or Medicaid patients or for the recommendation,
arranging, leasing or purchasing of goods or services for which payment may be
made under the Medicare or Medicaid programs. Violation of the fraud and abuse
laws is punishable with criminal and civil penalties. Federal law also imposes
significant penalties for false or improper billings for physician services. In
addition, the federal "Stark" law generally prohibits referrals by physicians
for designated health services reimbursable under the Medicare and Medicaid
programs to entities with which such physicians or their immediate family
members have a financial interest.
There can be no assurance that review of the operations of the Companies
prior to the Merger, or the operations of the New PCs and PPI after the Merger,
by courts or regulatory authorities will not result in a determination or
further action that could have a material adverse effect on PPI. Moreover, there
can be no assurance that existing laws and regulations will not be amended,
interpreted or applied in the future in such a way as to have a material adverse
effect on PPI, or that additional laws will not be enacted.
Significant risk factors relating to the business of the Companies and PPI
are described in more detail below.
FRAUD AND ABUSE LAWS
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. In recent years, there has
been increasing scrutiny by law enforcement authorities, the United States
Department of Health and Human Services, various state agencies, the federal and
state courts and Congress, of financial arrangements between health care
providers and potential sources of patient referrals to ensure that such
arrangements are not disguised mechanisms to pay for patient referrals. The
Anti-Kickback Statute is broad in scope and interpretations by various courts
have been ambiguous or conflicting in certain respects. To the extent PPI is
deemed to be either a referral source or a separate provider under the New PC
Management Agreements that is in a position to influence referrals to or from
physicians, the financial arrangements under these agreements could be subject
to scrutiny and prosecution under the Anti-Kickback Statute.
Furthermore, each of the Companies has had a history of receiving and making
referrals to providers in their respective communities. There can be no
assurance that the business practices of the Companies prior to the consummation
of the Merger would be construed to comply with the fraud and abuse laws in all
respects by applicable federal or state authorities. PPI, as successor in
interest to the Companies, would be subject to liability in connection with any
enforcement action taken against the Companies by a regulatory enforcement
agency with respect to such laws.
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<PAGE>
PHYSICIAN SELF-REFERRAL LAW
Significant prohibitions against physician "self-referrals" apply to a
variety of physician-owned or physician-interested entities. The Stark statute
(42 U.S.C. Section1395nn) generally prohibits referrals by physicians for
designated health services reimbursable under the Medicare and Medicaid programs
to entities in which the referring physician or an immediate family member has
an ownership interest or compensation arrangement, unless an exception provided
under the statute applies. The Stark statute is broad and ambiguous in some
respects, and regulations clarifying the provisions have been issued only with
respect to clinical laboratory services (which was the subject of the "Stark I"
legislation). Regulations interpreting the portion of the Stark statute known as
"Stark II" or future clarification of existing regulations could require PPI,
the New PCs and related physicians to modify the form of their relationships.
Violations of the Stark statute are punishable by civil penalties, including
exclusion from the Medicare and Medicaid programs.
THE CORPORATE PRACTICE OF MEDICINE
Certain laws prohibit the practice of medicine by corporations other than
professional corporations. It is possible that the operations of PPI could be
challenged on grounds that PPI, a business corporation, will participate in
operations or revenues of the New PCs and other PPI-managed medical practices to
a prohibited extent. Oregon law regarding the corporate practice of medicine
does not specifically approve or forbid practice management companies from
contracting with professional corporations and has been subjected to limited
judicial and regulatory interpretation. Therefore, no assurance can be given
that PPI's activities will be found to be in compliance with state law if
challenged. In the event of a prohibition against the PPI form of business, the
relationship between PPI and each of the New PCs may have to be modified,
possibly resulting in a reduction of revenues received by PPI for managing the
New PCs.
FEE-SPLITTING LAWS
The laws of many states prohibit physicians from splitting fees with
non-physicians. Although Oregon currently does not have such a prohibition,
there is no assurance that Oregon will not enact new laws or interpret existing
laws in a manner that would require modifications to PPI's business in order to
comply with such a law. In addition, expansion of the operations of PPI to
jurisdictions that have laws that could be deemed to restrict or prohibit PPI's
form of arrangement with managed medical groups may require structural and
organizational modifications to PPI's form of management relationship, which
could have an adverse effect on PPI.
MEDICARE/MEDICAID REIMBURSEMENT
State and federal civil and criminal statutes impose substantial penalties,
including civil and criminal fines and imprisonment, upon health care providers
who fraudulently or wrongfully bill governmental or other third-party payors for
health care services. The federal law prohibiting false billings allows a
private person to bring a civil action in the name of the United States
government for violations of its provisions. While management of each Company
has attempted to comply with billing requirements, there is no assurance that
PPI's or the New PCs' activities will not be challenged or scrutinized by
governmental authorities. Moreover, Medicare and other reimbursement rules
impact the fee structure of medical billing. To the extent PPI's or the New PCs'
billing arrangements may need to be modified to comply with existing or modified
regulations, there could be a material adverse financial effect on PPI.
OREGON INSURANCE LAW
The Oregon Department of Consumer and Business Affairs, Insurance Division
(the "Insurance Division"), regulates the transaction of insurance pursuant to
the Oregon Insurance Code. Pursuant to
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Insurance Division Bulletin 96-2 (the "Bulletin") issued in April 1996 by the
Oregon Insurance Commissioner, health care providers that are compensated on a
capitated basis by a health insurer or health care service contractor ("HCSC")
are not required to obtain a certificate of authority to transact insurance if
the capitation is internal to a policy of insurance that is delivered by an
authorized insurer or HCSC. The Bulletin also states that discounted
fee-for-service arrangements with reasonable limits on discounts (i.e., not
open-ended discounts) also do not require a certificate of authority. PPI
arrangements should fall into these categories and therefore be exempt from
regulation as an insurance company. There is no assurance, however, that the
position of the Insurance Division will not change in the future. In such an
event, PPI may be required to restructure its New PC Management Agreements or
apply for a certificate of authorization, which could have a material adverse
effect on PPI.
ANTITRUST LAWS
Because the New PCs will remain separate legal entities after the Merger,
they may be deemed competitors subject to a range of antitrust laws which
prohibit anti-competitive conduct, including price fixing, concerted refusals to
deal and division of market. There is no assurance that the review of the
businesses of the New PCs and PPI by courts or regulatory authorities will not
result in a determination that could have a material adverse effect on PPI.
PROPOSED LEGISLATION
In addition to current federal regulations, the Clinton Administration and
several members of Congress have proposed legislation for comprehensive reforms
affecting the payment for and availability of health care services. Aspects of
certain such health care proposals, such as reductions in Medicare and Medicaid
payments and additional prohibitions on direct or indirect physician ownership
of facilities to which they refer patients, if adopted, could have a material
adverse effect on PPI. There can be no assurance as to the ultimate content,
timing or effect of any health care reform legislation, nor is it possible at
this time to estimate the impact of potential legislation on PPI.
At the time of preparation of this Joint Proxy Statement/Prospectus, certain
legislation also has been proposed in Oregon that would regulate compensation
for medical services (the "Compensation Proposal") and would amend the Oregon
constitution to enable any willing provider to provide services to members
covered by HMOs and other health plans (the "Any Willing Provider Proposal").
The Compensation Proposal contemplates a new statute that would provide that a
health care provider shall not be directly or indirectly compensated, except by
an individual or family, for the delivery of health care according to any
standard other than one or more of the following: (A) work performed; (B) hourly
wage; (C) prearranged salary/benefits; (D) bonuses based upon work performed;
and (E) reimbursement for expenses. The Compensation Proposal also provides
that, after December 31, 1997, any health care provider who has not complied
with such requirements shall have his or her business and professional license
suspended until compliance is achieved. The Any Willing Provider Proposal would
amend the Constitution of the State of Oregon to provide that no law may be
enacted to restrain any person from seeking or receiving the services of various
types of health care providers working within the providers' scope of practice
as established by law. While such amendment expressly states that it is not
intended to prevent an entity from employing measures that would control costs
of health care, specific restrictions may affect the way PPI or the New PCs do
business. To the extent that either or both of the Compensation Proposal or the
Any Willing Provider Proposal is enacted into law, this could have a material
adverse effect on PPI.
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the PPI Certificate of Incorporation, the PPI Bylaws
and Delaware law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of PPI and limit the price that
certain investors might pay in the future for shares of PPI Class A Common
29
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Stock. These provisions include a staggered board of directors and authority of
the PPI Board to authorize the issuance, without further shareholder approval,
of preferred stock with rights and privileges senior to PPI Class A Common
Stock. PPI also is subject to Section 203 of the General Corporation Law of the
State of Delaware ("DGCL"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder.
Certain PPI stock option plans may also inhibit a change in control of PPI.
The 1996 Stock Option Plan for Employees of Physician Partners, Inc., the 1996
Stock Option Plan for Non-Employee Directors of Physician Partners, Inc. (the
"Director Option Plan") and the 1996 Stock Option Plan for Non-Employee
Providers Affiliated with Physician Partners, Inc. (the "Provider Option Plan")
provide discretion to the committee that administers such plans (the
"Committee") to shorten the time during which options may be exercised or cancel
options upon payment in cash of the amount determined by the Committee to be the
fair market value of the option. The Physician Partners, Inc. Change in Control
Plan (the "Change in Control Plan") contains several significant provisions that
may inhibit a takeover, including a provision making benefits payable to
eligible participants, a provision that participants will not be required to
work to reduce the amount of payments to such person by seeking alternative
employment in the event of a change in control, and a provision that would
require PPI or its successor to pay all reasonable legal fees and related
expenses incurred by a plan participant as a result of contesting or disputing a
termination of employment following a change in control whether or not such
dispute is resolved in the participant's favor.
Pursuant to PPI's Rights Agreement, the PPI Board is authorized to declare a
dividend distribution of one right (a "Right") for each outstanding share of PPI
Common Stock to shareholders of record at the close of business on a specified
record date. The Rights have certain anti-takeover effects. The Rights will
cause substantial dilution to a person or group that attempts to acquire PPI on
terms not approved by the PPI Board. The Rights should not interfere with any
merger or other business combination approved by the PPI Board since the PPI
Board may, at its option, at any time until 10 days following the stock
acquisition date, redeem all, but no less than all, of the then outstanding
Rights at the applicable redemption price. The PPI Board currently has no plans
to declare such distribution. For further details of the terms of the Rights,
see "Description of PPI Capital Stock."
MANAGEMENT INFORMATION SYSTEM AND OTHER TECHNOLOGY NEEDS
Physician practice management depends heavily on access to sophisticated and
state of the art information systems in order to track utilization of services,
costs, patient encounters, diagnoses and other elements of a medical practice.
The development of new technologies or refinement of existing technologies
potentially could make existing information systems technologically obsolete or
cause a reduction in the value of, or reduce the need for, the equipment the
Companies currently use. Should such developments occur, there can be no
assurance that PPI will be able to acquire any new or improved equipment or
upgrades to the extent necessary to service its customers and to compete
effectively in the industry. The inability of PPI to access or acquire new
equipment in a timely manner could have a material adverse effect on PPI.
Each of the Companies presently has well functioning practice management
electronic data systems. Each of these systems, however, is incompatible with
the other two. There is no intent or need to integrate the practice management
systems of the Companies and consequently no synergies can immediately be
presumed. There may be future problems associated with the incompatibility of
these data systems.
The rapidity of change and technological obsolescence will pose challenges
to PPI with significant downside financial impact. New developments in areas
such as voice recognition systems, electronic medical record, integrated data
management systems (e,g, ancillary data, hospital data) offer significant
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potential; however, such developments come with serious financial risk. There
can be no assurances that PPI can develop and execute a sound plan of integrated
electronic data management in the future.
POSSIBLE INABILITY TO RETAIN OR ATTRACT KEY PERSONNEL; DEPENDENCE ON EXECUTIVE
OFFICERS
The success of PPI will depend largely on its ability to retain and attract
qualified key management personnel. PPI will be highly dependent on each of its
executive officers, in particular, upon the consummation of the Merger. There
can be no assurance that PPI will be able to retain such personnel and attract
any additional personnel deemed necessary by PPI. Any failure to retain key
employees or attract qualified new personnel deemed necessary to operate PPI
successfully could have a material adverse effect on PPI.
CONSENT TO ASSIGNMENT OF HEALTH PLAN CONTRACTS
In connection with the reorganization of the respective Companies and the
Merger, it is contemplated that, to the extent legally permissible, the
agreements with health plans that the respective Companies currently maintain
will be assigned to PPI, and that the New PCs will provide the professional
services pursuant to the New PC Management Agreements. In order to effect the
assignment (by operation of law, pursuant to the Merger) of health plan
contracts to PPI, certain such contracts require that the Companies obtain
consents from the respective health plans. If and to the extent that health
plans are unwilling to consent to the assignment of such contracts to PPI, PPI's
financial position may be materially adversely affected.
NO PUBLIC TRADING MARKET FOR PPI CLASS A COMMON STOCK
There is currently no public market for the shares of PPI Class A Common
Stock. There is no assurance that such a market will develop. In addition,
holders of PPI Class A Common Stock will be prohibited from making any transfer
or sale of such stock for a period of five years after the Merger other than in
connection with certain "piggyback" registration rights of PPI shareholders. See
"Terms of Reorganization and Merger--Resales of PPI Class A Common Stock and
Registration Rights".
PPI'S REPURCHASE RIGHT
PPI will have the right to repurchase all or any portion of shares of PPI
Class A Common Stock owned by a stockholder, for a specified price, in certain
events. The repurchase price would be (a) the fair market value of such shares
at the time of repurchase if a stockholder ceases (for reasons other than death,
disability or retirement) to be an employee or member of the board of directors
of (i) PPI or (ii) any entity with which PPI has entered into a practice
Management Agreement or (b) the lesser of (i) the fair market value of the stock
at the time of issuance or (ii) the fair market value of such stock at the time
of such repurchase, in either case in the event such stockholder undertakes
activities which are competitive with PPI or with physician groups with which
PPI has entered into a practice Management Agreement.
INCOME TAX RISKS
PPI and the Companies will receive an opinion from McDermott, Will & Emery
to the effect that the Merger will, more likely than not, satisfy the
requirements for tax deferral under Section 368 of the Code. No ruling will be
requested from the Internal Revenue Service (the "IRS") on this issue. An
opinion of counsel is not binding on the IRS or the courts. Furthermore, no
assurance can be given that the tax-deferred characterization of the Merger will
not be challenged, or if challenged, will be defended successfully. If the tax
characterization of the Merger is successfully challenged, there would be
significant adverse tax consequences to the Companies and their respective
shareholders. In addition, the PC Reorganization Transactions may be treated as
taxable distributions, with the effect of the creation of taxable income at both
the Company and the shareholder levels.
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RISKS RELATING TO FAILURE TO APPROVE THE MERGER AND PC REORGANIZATION
TRANSACTIONS
The Companies have incurred and are expected to further incur substantial
costs, in an aggregate amount estimated to be $3,500,000 through the end of
1996, in connection with the analysis, planning, documentation, negotiation and
approval process related to the Merger and PC Reorganization Transactions. In
the event the shareholders of the Companies do not approve the proposed Merger
and Reorganization Transactions, a large portion of such costs will be shared
pro rata by the Companies according to the number of full-time equivalent
providers of each Company on June 1, 1996, pursuant to the terms of the Expense
Sharing Agreement, dated as of July 29, 1996, as amended and restated September
18, 1996, among HealthFirst, Corvallis Clinic, Medford Clinic and PPI.
Additional costs will be incurred by PPI (which costs are guaranteed by the
Company) in connection with the payment of severance and benefit amounts to PPI
executives Mr. Goldberg, Dr. Bonazzola and Mr. Dupell. Further, under the
Expense Sharing Agreement, the Companies would be required to reimburse PPI for
certain additional liabilities to which it may be subject. PPI has entered into
a seven-year lease of office space (which may be sublet with the consent of the
landlord thereto, such event not to be unreasonably withheld) in Portland,
Oregon, which has a current rent obligation of $7,317 per month and increases
annually based on inflation.
Another risk of failure to approve the Merger and PC Reorganization
Transactions is that the Companies would remain in their current respective
circumstances, which include the circumstances that led the respective board of
directors of each Company to recommend the Merger. See "HealthFirst's Reasons
for the Merger," "Corvallis Clinic's Reasons for the Merger" and "Medford
Clinic's Reasons for the Merger."
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THE HEALTHFIRST SHAREHOLDER MEETING
TIME, DATE AND PLACE OF HEALTHFIRST MEETING
The HealthFirst Special Meeting will be held at 6:30 p.m., Pacific Standard
Time ("P.S.T."), on Wednesday, December 18, 1996 at Lloyd Center, Red Lion
Hotel, 1000 NE Multnomah Ave., Portland, Oregon 97232.
BUSINESS TO BE CONDUCTED AT THE HEALTHFIRST MEETING
Each copy of this Joint Proxy Statement/Prospectus mailed to HealthFirst
shareholders is accompanied by a form of proxy solicited by the HealthFirst
Board of Directors ("HealthFirst Board") for use at the HealthFirst Special
Meeting and at any adjournment thereof. At the HealthFirst Special Meeting, the
HealthFirst shareholders will vote upon the HealthFirst Reorganization Proposal
and the Merger Proposal. See "The PC Reorganization Transactions and Related
Transactions" and "The Merger and Related Transactions." The HealthFirst
shareholders will also be asked at the HealthFirst Special Meeting to vote upon
the PPI Incentive Compensation Plans Proposal. See "Proposal No. 3: Approval of
the PPI Incentive Compensation Plans Proposal" for a description of the material
provisions of the PPI Incentive Compensation Plans.
PROXIES: VOTING AND REVOCATION
When a proxy is properly executed and returned, HealthFirst Class A Shares
will be voted in accordance with the directions indicated on the proxy, or if no
directions are indicated, such shares will be voted FOR each of the HealthFirst
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal. Any HealthFirst shareholder giving a proxy may revoke his or her
proxy at any time before its exercise at the HealthFirst Special Meeting by (i)
giving written notice of such revocation, (ii) signing and delivering a proxy
bearing a later date, to Vern R. Williams, M.D., Secretary, HealthFirst Medical
Group, P.C., 10535 NE Glisan, Portland, Oregon 97220 or (iii) attending the
HealthFirst Special Meeting and voting in person.
HEALTHFIRST SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO HEALTHFIRST IN THE ENCLOSED
POSTAGE-PAID ENVELOPE, EVEN IF THEY ARE PLANNING TO ATTEND THE HEALTHFIRST
SPECIAL MEETING.
PROXY SOLICITATION
HealthFirst will bear the costs of soliciting proxies from its shareholders.
Proxies may be solicited by directors, officers or employees of HealthFirst in
person, by telephone or through other forms of communication without payment of
additional compensation to such persons. HealthFirst does not intend to incur
any outside expenses in connection with the solicitation of proxies.
VOTE REQUIRED
The presence in person or by proxy of persons entitled to vote a majority of
the outstanding HealthFirst Class A Shares is necessary to constitute a quorum
at the HealthFirst Special Meeting. Under the Restated Articles of HealthFirst
and Oregon Law, the holders of a majority of the outstanding HealthFirst Class A
Shares must approve the HealthFirst Reorganization Proposal, the Merger Proposal
and the PPI Incentive Compensation Plans Proposal. Votes will be counted by the
HealthFirst Board of Directors. Neither the Restated Articles nor the Bylaws of
HealthFirst contain any provisions with respect to the treatment or effect of
abstentions. Abstentions will have the same effect as a vote against the
HealthFirst Reorganization Proposal, the Merger Proposal and the PPI Incentive
Compensation Plans Proposal.
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Only holders of record of HealthFirst Class A Shares at the close of
business on November 8, 1996, are entitled to receive notice of, and to vote at,
the HealthFirst Special Meeting. As of November 1, 1996, there were 9,200 Class
A Shares outstanding and entitled to vote, with each such share entitled to one
vote, and 92 holders of record thereof. As of that date, the directors and
executive officers of HealthFirst, together with their affiliates, beneficially
held an aggregate of 1,100 HealthFirst Class A Shares, not including options,
warrants or other rights to purchase HealthFirst Class A Shares (representing
approximately 10% of the outstanding HealthFirst Class A Shares). The directors
and executive officers of HealthFirst have indicated that it is their present
intention to vote all of the shares held thereby FOR the approval of the
HealthFirst Reorganization Proposal, the Merger Proposal and the PPI Incentive
Compensation Plans Proposal.
OTHER MATTERS
HealthFirst is not aware of any other business to be brought before the
HealthFirst Special Meeting. If any matters come before the HealthFirst Special
Meeting which are not directly referred to in this Joint Proxy
Statement/Prospectus or the enclosed proxy, including matters incident to the
conduct of the HealthFirst Special Meeting, the proxy holders will vote the
shares represented by the proxies in accordance with the recommendations of the
HealthFirst Board.
THE CORVALLIS CLINIC SHAREHOLDER MEETING
TIME, DATE AND PLACE OF CORVALLIS CLINIC MEETING
The Corvallis Clinic Special Meeting will be held at 6:30 p.m., P.S.T., on
Thursday, December 19, 1996, at 3680 NW Samaritan Drive, Corvallis, Oregon
97330.
BUSINESS TO BE CONDUCTED AT THE CORVALLIS CLINIC MEETING
Each copy of this Joint Proxy Statement/Prospectus mailed to Corvallis
Clinic shareholders is accompanied by a form of proxy solicited by the Board of
Directors of Corvallis Clinic (the "Corvallis Clinic Board") for use at the
Corvallis Clinic Special Meeting and at any adjournment thereof. At the
Corvallis Clinic Special Meeting, the Corvallis Clinic shareholders will vote
upon the Corvallis Clinic Reorganization Proposal and the Merger Proposal. See
"The PC Reorganization Transactions and Related Transactions" and "The Merger
and Related Transactions." The Corvallis Clinic shareholders will also be asked
at the Corvallis Clinic Special Meeting to vote upon the PPI Incentive
Compensation Plans Proposal. See "Proposal No. 3: Approval of the PPI Incentive
Compensation Plans Proposal" for a description of the material provisions of the
PPI Incentive Compensation Plans.
PROXIES: VOTING AND REVOCATION
When a proxy is properly executed and returned, the shares of Corvallis
Clinic Class A Stock and Corvallis Clinic Class B Stock will be voted in
accordance with the directions indicated on the proxy, or if no directions are
indicated, such shares will be voted FOR each of the Corvallis Clinic
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal. Any Corvallis Clinic shareholder giving a proxy may revoke his
or her proxy at any time before its exercise at the Corvallis Clinic Special
Meeting by (i) giving written notice of such revocation, (ii) signing and
delivering a proxy bearing a later date, to Darrel D. Bibler, M.D., Secretary,
The Corvallis Clinic, P.C., Corvallis, Oregon 97330 or (iii) attending the
Corvallis Clinic Special Meeting and voting in person.
CORVALLIS CLINIC SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO CORVALLIS CLINIC IN THE ENCLOSED
POSTAGE-PAID ENVELOPE, EVEN IF THEY ARE PLANNING TO ATTEND THE CORVALLIS CLINIC
SPECIAL MEETING.
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PROXY SOLICITATION
Corvallis Clinic will bear the costs of soliciting proxies from its
shareholders. Proxies may be solicited by directors, officers or employees of
Corvallis Clinic in person, by telephone or through other forms of communication
without payment of additional compensation to such persons. Corvallis Clinic
does not intend to incur any outside expenses in connection with the
solicitation of proxies.
VOTE REQUIRED
The presence in person or by proxy of persons entitled to vote a majority of
the outstanding shares of each of Corvallis Clinic Class A Stock and Corvallis
Clinic Class B Stock is necessary to constitute a quorum at the Corvallis Clinic
Special Meeting. Under the Restated Articles of Corvallis Clinic and Oregon Law,
the holders of two-thirds of the outstanding shares of Corvallis Clinic Class A
Stock and two-thirds of the outstanding shares of Corvallis Clinic Class B
Stock, in each case as a separate voting group, must approve the Corvallis
Clinic Reorganization Proposal, the Merger Proposal and the PPI Incentive
Compensation Plans Proposal. Votes will be counted by the Corvallis Clinic Board
of Directors. Neither the Restated Articles nor the Bylaws of Corvallis Clinic
contain any provisions with respect to the treatment or effect of abstentions.
Abstentions will have the same effect as a vote against the Corvallis Clinic
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal.
Only holders of record of Corvallis Clinic Class A Stock and Corvallis
Clinic Class B Stock at the close of business on November 8, 1996, are entitled
to receive notice of, and to vote at, the Corvallis Clinic Special Meeting. As
of November 1, 1996, there were 63 shares of Corvallis Clinic Class A Stock and
12,035 shares of Corvallis Clinic Class B Stock outstanding and entitled to
vote, with each such share entitled to one vote. There were 63 holders of record
of Corvallis Clinic Class A Stock and 76 holders of record of Corvallis Clinic
Class B Stock. As of that date, the directors and executive officers of
Corvallis Clinic, together with their affiliates, beneficially held an aggregate
of six shares of Corvallis Clinic Class A Stock and an aggregate of 891 shares
of Corvallis Clinic Class B Stock, exclusive of options, warrants or other
rights to purchase Corvallis Clinic Class A Stock or Corvallis Clinic Class B
Stock (representing approximately ten percent and seven percent of the
outstanding shares of Corvallis Clinic Class A Stock and Corvallis Clinic Class
B Stock, respectively). The directors and executive officers of Corvallis Clinic
have indicated that it is their present intention to vote all of the shares held
thereby FOR the approval of the Corvallis Clinic Reorganization Proposal, the
Merger Proposal and the PPI Incentive Compensation Plans Proposal.
OTHER MATTERS
Corvallis Clinic is not aware of any other business to be brought before the
Corvallis Clinic Special Meeting. If any matters come before the Corvallis
Clinic Special Meeting which are not directly referred to in this Joint Proxy
Statement/Prospectus or the enclosed proxy, including matters incident to the
conduct of the Corvallis Clinic Special Meeting, the proxy holders will vote the
shares represented by the proxies in accordance with the recommendations of the
Corvallis Clinic Board.
THE MEDFORD CLINIC SHAREHOLDER MEETING
TIME, DATE AND PLACE OF MEDFORD CLINIC MEETING
The Medford Clinic Special Meeting will be held at 6:00 p.m., P.S.T., on
Monday, December 16, 1996, at 555 Black Oak Drive, Medford, Oregon 97504.
BUSINESS TO BE CONDUCTED AT THE MEDFORD CLINIC MEETING
Each copy of this Joint Proxy Statement/Prospectus mailed to Medford Clinic
shareholders is accompanied by a form of proxy solicited by the Board of
Directors of Medford Clinic (the "Medford
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Clinic Board") for use at the Medford Clinic Special Meeting and at any
adjournment thereof. At the Medford Clinic Special Meeting, the Medford Clinic
shareholders will vote upon the Medford Clinic Reorganization Proposal and the
Merger Proposal. See "The PC Reorganization Transactions and Related
Transactions" and "The Merger and Related Transactions." The Medford Clinic
shareholders will also be asked at the Medford Clinic Special Meeting to vote
upon the PPI Incentive Compensation Plans Proposal. See "Proposal No. 3:
Approval of the PPI Incentive Compensation Plans Proposal" for a description of
the material provisions of the PPI Incentive Compensation Plans.
PROXIES: VOTING AND REVOCATION
When a proxy is properly executed and returned, the shares of Medford Clinic
Common Stock will be voted in accordance with the directions indicated on the
proxy, or if no directions are indicated, such shares will be voted FOR each of
the Medford Clinic Reorganization Proposal, the Merger Proposal and the PPI
Incentive Compensation Plans Proposal. Any Medford Clinic shareholder giving a
proxy may revoke his or her proxy at any time before its exercise at the Medford
Clinic Special Meeting by (i) giving written notice of such revocation, (ii)
signing and delivering a proxy bearing a later date, to Jon Ness, Secretary,
Medford Clinic, P.C., 555 Black Oak Drive, Medford, Oregon 97504 or (iii)
attending the Medford Clinic Special Meeting and voting in person.
MEDFORD CLINIC SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO MEDFORD CLINIC IN THE ENCLOSED
POSTAGE-PAID ENVELOPE, EVEN IF THEY ARE PLANNING TO ATTEND THE MEDFORD CLINIC
SPECIAL MEETING.
PROXY SOLICITATION
Medford Clinic will bear the costs of soliciting proxies from its
shareholders. Proxies may be solicited by directors, officers or employees of
Medford Clinic in person, by telephone or through other forms of communication
without payment of additional compensation to such persons. Medford Clinic does
not intend to incur any outside expenses in connection with the solicitation of
proxies.
VOTE REQUIRED
The presence in person or by proxy of persons entitled to vote a majority of
the outstanding shares of Medford Clinic Common Stock is necessary to constitute
a quorum at the Medford Clinic Special Meeting. Under the Articles of
Incorporation of Medford Clinic and Oregon Law, the holders of a majority of the
outstanding shares of Medford Clinic Common Stock must approve the Medford
Clinic Reorganization Proposal, the Merger Proposal and the PPI Incentive
Compensation Plans Proposal. Votes will be counted by the Medford Clinic Board
of Directors. Neither the Articles of Incorporation nor the Bylaws of Medford
Clinic contain any provisions with respect to the treatment or effect of
abstentions. Abstentions will have the same effect as a vote against the Medford
Clinic Reorganization Proposal, the Merger Proposal and the PPI Incentive
Compensation Plans Proposal.
Only holders of record of Medford Clinic Common Stock at the close of
business on November 8, 1996, are entitled to receive notice of, and to vote at,
the Medford Clinic Special Meeting. As of November 1, 1996, there were 57 shares
of Medford Clinic Common Stock outstanding and entitled to vote, with each such
share entitled to one vote, and 57 holders of record thereof. As of that date,
the directors and executive officers of Medford Clinic, together with their
affiliates, beneficially held an aggregate of seven shares of Medford Clinic
Common Stock, exclusive of options, warrants or other rights to purchase Medford
Clinic Common Stock (representing approximately 12% of the outstanding shares of
Medford Clinic Common Stock). The directors and executive officers of Medford
Clinic have indicated that it is their present intention to vote all of the
shares held thereby FOR the approval of the Medford Clinic Reorganization
Proposal, the Merger Proposal and the PPI Incentive Compensation Plans Proposal.
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OTHER MATTERS
Medford Clinic is not aware of any other business to be brought before the
Medford Clinic Special Meeting. If any matters come before the Medford Clinic
Special Meeting which are not directly referred to in this Joint Proxy
Statement/Prospectus or the enclosed proxy, including matters incident to the
conduct of the Medford Clinic Special Meeting, the proxy holders will vote the
shares represented by the proxies in accordance with the recommendations of the
Medford Clinic Board.
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THE MERGER AND RELATED TRANSACTIONS
GENERAL
The descriptions in this Joint Proxy Statement/Prospectus of the terms and
conditions of the PC Reorganization Proposal and the Merger Proposal are
qualified in their entirety by reference to the copy of the Reorganization and
Merger Agreement attached as Appendix A to this Joint Proxy Statement/
Prospectus, and to each of the other Appendices to this Joint Proxy
Statement/Prospectus, all of which are incorporated herein by this reference.
The Reorganization and Merger Agreement contemplates that each of the
Companies will merge with and into PPI, provided that all conditions to the
consummation of the Merger are satisfied or waived. Each shareholder of
HealthFirst, Corvallis Clinic and Medford Clinic (other than those shareholders
who exercise their dissenters' rights under the Oregon Business Corporation Act)
will receive shares of PPI Class A Common Stock in exchange for their shares in
HealthFirst, Corvallis Clinic or Medford Clinic, as applicable (with the number
of shares received based on a separate exchange ratio for each class and series
of stock of each Company, as necessary). It is contemplated that the Merger will
occur as soon as practicable after the HealthFirst Special Meeting, the
Corvallis Clinic Special Meeting, and the Medford Clinic Special Meeting, and
upon satisfaction or waiver of all of the other conditions set forth in the
Reorganization and Merger Agreement. The Merger is presently anticipated to
occur on or before December 31, 1996. See "The Merger and Related Transactions."
BACKGROUND OF THE MERGER
In early May 1995, the Corvallis Clinic Board held a meeting which included
members of the Corvallis Clinic Board and senior management to explore strategic
issues and capital needs. The Corvallis Clinic Board reviewed summaries of
industry research reports as well as the prospectuses relating to the then-
recent initial public offering of MedPartners, Inc. and other similar offerings.
The Corvallis Clinic Board and senior management discussed (i) the concept of a
physician practice management company (a "PPM") and the potential value added
thereby to medical groups, (ii) the possibility of Corvallis Clinic forming a
PPM, (iii) the possible opportunities to join other similar group practices and
form a PPM and (iv) preliminary criteria of a PPM. The Corvallis Clinic Board
considered Oregon a unique market based on several factors: (a) Oregon is one of
the most heavily managed care states in the U.S., (b) Oregon had, to date,
little national physician practice management penetration, (c) Oregon has a
number of independent, historically strong, physician-owned primary care based
multi-specialty group practices which do not compete with one another in their
distinct local markets and (d) Oregon has a limited number of major payors which
contract with each of the large primary care based multi-specialty groups.
The Corvallis Clinic Board and senior management developed several criteria
for primary care based multi-specialty group practices in Oregon: (i) The groups
must be physician owned, (ii) the groups must be physician governed, (iii) the
groups must be for-profit, (iv) the groups must have had significant successful
history in their respective communities, (v) the groups must not be competitors
with one another (i.e., separate markets) and (vi) the groups must have strong
physician management (i.e., the existence of a paid medical director.) Based on
this informal survey, the idea of merging medical groups was presented to a
limited number of qualifying medical groups in Oregon. Medford Clinic and
Metropolitan Clinic, PC, the predecessor to HealthFirst ("Metropolitan"), were
approached and responded positively to the idea of pursuing the possibility of a
merger.
Later in May 1995, the senior management of Corvallis Clinic met with the
executive committee of the Medford Clinic Board and Medford Clinic senior
management and reviewed similar materials and discussed similar issues,
including preliminary discussions regarding a merger between Corvallis Clinic
and Medford Clinic.
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In July and August 1995, Corvallis Clinic held similar preliminary meetings
with the leadership of three other Oregon group practices, including
HealthFirst. Of the three, only HealthFirst expressed a strong interest in
pursuing merger discussions and based on such initial meetings, representatives
of each of Corvallis Clinic, Medford Clinic and HealthFirst determined that it
would be in the best interest of such Company to further explore a business
combination with the other Companies. As a result of these meetings, the board
of directors of each Company concluded that the other Companies were compatible
in financial condition, assessment of future market changes and business
philosophy. Each Company also acknowledged that its management team possessed
strengths that would be compatible with and complementary to that of the other
Companies. An initial meeting of the chief executive officers of the Companies
and the chief financial officer of Corvallis Clinic was held in late August
1995. The primary issues discussed during such meeting were (a) summary of the
preliminary PPM industry research, (b) proposed timetable and (c) general
outline of a letter of intent.
Early in the discussion process, David Goldberg, a consultant was retained
by HealthFirst and Medford Clinic to explore appropriate long-term business
plans for such entities. Mr. Goldberg became involved in preliminary transaction
development discussions.
In September 1995, the three Companies executed a letter of intent and
confidentiality agreement to initiate a preliminary study to determine what a
merged organization might comprise. In October 1995, a preliminary compilation
of the Companies' respective unaudited historical financial information was
presented at a meeting of the senior management of the three Companies. The
Companies agreed to provide the other Companies, on a confidential basis, with
information on corporate structure, financial condition, capital structure and
contractual obligations with third parties. Site visits were also approved by
the Companies to permit the other Companies to perform a preliminary financial
analysis. By the end of September 1995, HealthFirst, Corvallis Clinic and
Medford Clinic were negotiating and developing preliminary terms and structure
of the proposed reorganization and merger transactions for presentations to
their respective shareholders. Based upon the perceived complimentary nature of
the three Companies as to markets, management style, facilities and business
philosophy, the respective boards of directors and managements began to form a
belief that a merger among the Companies would present strategic opportunities
not available from other potential acquisition or merger partners.
In January 1996, members of the respective boards of directors and senior
management met to discuss the proposed business combination and the process for
further discussion. The meeting was also attended by representatives of
potential financial and accounting advisors. The participants in such meeting
reviewed the preliminary unaudited historical financial information previously
compiled, discussed PPM industry overview and a preliminary process timetable.
On January 13, 1996, the Companies entered into the second letter of intent
pursuant to which the Companies agreed to share the expenses of outside experts
in preparing a draft business plan for the proposed business combination. During
the first quarter of 1996, each Company, along with its legal and accounting
advisors, assessed projected transaction costs relating to the proposed business
combination with the other Companies.
The chief executive officers of the Companies met several times during
January and February to study and better understand issues regarding management,
structure, governance, tax concerns and future operational concerns. At the end
of February, the three Companies agreed to commission a draft business plan of
the proposed business combination to be completed in April 1996.
In March 1996, a working group was convened comprised of the chief executive
officers and physician board leaders from each of the Companies and the chief
financial officer of Corvallis Clinic. Legal counsel specializing in health care
business combinations was also present. Issues discussed during the initial
meeting of such working group included (i) process for selection of an
accounting auditing firm, (ii) process for interviewing and selection of an
investment banking advisor, (iii) overview of a proposed reorganization
structure, (iv) management and governance issues and (v) work plan.
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On April 4, 1996, the working group reconvened to provide an update on the
proposed corporate management and board structure and for presentation of the
general project goals to the respective Companies. On the same day, the
Companies entered into a confidentiality agreement to keep confidential all
information provided by the other Companies in connection with due diligence for
the proposed reorganization and merger.
On June 28, 1996, the Companies entered into a memorandum of understanding
which set forth the basic terms and structure of the proposed reorganization and
merger and the agreement by the Companies not to initiate or solicit any inquiry
or proposal with respect to, or engage in negotiations concerning, any
acquisition or business combination with any person or entity other than the
other Companies. Pursuant to the memorandum of understanding, the Companies also
agreed that the execution and delivery of definitive documentation relating to
the proposed reorganization and merger are subject to completion of due
diligence and approval of the respective boards of directors of the Companies.
On July 24, 1996, the Corvallis Clinic Board held a board meeting and
approved the Corvallis Clinic Reorganization Proposal and the Merger Proposal,
subject to approval of the shareholders of the Company.
On July 25, 1996, the Medford Clinic Board held a board meeting and approved
the Medford Clinic Reorganization Proposal and the Merger Proposal, subject to
approval of the shareholders of the Company.
On July 26, 1996, the HealthFirst Board held a board meeting and approved
the HealthFirst Reorganization Proposal and the Merger Proposal, subject to
approval of the shareholders of the Company.
On July 29, 1996, the Reorganization and Merger Agreement and the Expense
Sharing Agreement were executed and delivered by PPI and the Companies.
On September 13, 1996, the Reorganization and Merger Agreement and the
Expense Sharing Agreement, in each case as amended and restated, were executed
and delivered by PPI and the Companies. On November 4, 1996, an amendment to the
Reorganization and Merger Agreement was executed and delivered by PPI and the
Companies.
HEALTHFIRST'S REASONS FOR THE MERGER
In anticipation of changes in the business of medicine, Metropolitan, the
predecessor to HealthFirst, had by the early 1990s accomplished a change in its
corporate structure and begun to accumulate retained earnings, both of which
were unusual in medical groups. These changes at Metropolitan, combined with its
success since 1985 with managed and capitated care in the Portland area, allowed
for substantial growth from 1990 to 1995. Metropolitan subsequently entered into
a business combination with Suburban Medical Group ("Suburban"). As the product
of such business combination, HealthFirst positioned itself for continued
growth. However, despite the wide geographic coverage, large number of providers
and long-standing managed care experience of HealthFirst in the Portland area,
the HealthFirst Board also recognized the following conditions:
- CAPITAL NEEDS: Increased capital, which could no longer be obtained from
retained earnings, would be needed to sustain continued growth and build
increasingly necessary and capital-intensive infrastructure, including the
technological infrastructure necessary to improve computer capabilities,
link multiple HealthFirst sites and make the transition to electronic
medical record systems; and various sources of capital, including debt,
venture capital and existing physician practice management ("PPM")
companies would not adequately meet the needs of HealthFirst for capital
while maintaining physician control.
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- PHYSICIAN LEADERSHIP: Physicians, especially those in practice groups,
were in a better position than non-physician business people to guide the
direction of changes in medicine and to control costs because of their
unique role as advocates for patients.
- COMPETITION: Competitors in the HealthFirst market were beginning to
affiliate with PPMs, hospitals and other third parties, giving them a
better access to capital; and competition for managed care lives was
increasing in the Portland market.
In response to these business conditions, in March 1996, the HealthFirst
Board undertook a strategic planning initiative. One of the purposes of this
initiative was to explore a variety of potential strategic capital partners,
including local hospitals, publicly-traded PPMs and large medical group
practices. The HealthFirst Board eliminated consideration of local hospitals due
to the long-standing strategic position taken by HealthFirst and its predecessor
clinic (Metropolitan) to stay neutral in the highly competitive and complex
local hospital marketplace in Portland. Subsequently, the HealthFirst Board also
considered two national PPMs but concluded that they would provide relatively
little value added for HealthFirst because they were so large that the
HealthFirst Shareholders and their interests could have only an inconsequential
role in decision making. At the same time, the HealthFirst Board began to
establish essential criteria for selecting a strategic capital partner. The
criteria required that a strategic capital partner have significant physician
ownership, physician-controlled governance, extensive group practice experience
and culture, extensive managed care (capitated) experience and the ability to
exert local market leverage. Based on meetings with national PPMs and upon the
criteria established, the HealthFirst Board determined that a merger with other
Oregon primary care based multi-specialty groups was the preferred option for a
strategic and capital partnership. Accordingly, the HealthFirst Board and
management decided to enter into discussions with Corvallis Clinic and Medford
Clinic for a possible merger of the three Companies and the formation of PPI as
a PPM See "The Merger and Related Transactions--Background of the Merger". The
HealthFirst Board was willing to forego exploring proposals from other parties
for a specified period of time in order to concentrate solely on the Merger with
Corvallis Clinic and Medford Clinic. The downside risks of temporarily putting
aside other potential opportunities and the risk of incurring a break-up fee
were determined to be secondary to the benefits of the opportunity to attempt to
consummate the Merger.
The material favorable, unfavorable and certain neutral factors considered
by the HealthFirst Board in reaching its decision to approve the Merger Proposal
are set forth below:
- SYNERGIES: The HealthFirst Board's belief that medical groups with similar
culture and quality in delivery of health care services would be its best
partners. Medical groups with the proven ability to deliver quality
medical care and manage covered lives efficiently would benefit patients
as well as their shareholders. In Corvallis Clinic and Medford Clinic, the
HealthFirst Board perceived two excellent partners. By forming PPI,
HealthFirst believed that it would be able to withstand adverse market
conditions through realization of cost savings, elimination of redundancy
and economies of scale. The HealthFirst Board has identified several areas
where there are potential cost savings resulting from the proposed merger
(though such cost savings have not been quantified): (a) supply purchasing
(medical, surgical, drug and administrative); (b) business insurance
(including professional liability, capitation risk stop loss, business and
property liability and casualty insurance); (c) employee insurance
(health, life and disability); and (d) consolidation of existing long and
short term debts. The HealthFirst Board considered the possible inability
to realize synergies resulting from aligning with a Company--Corvallis
Clinic--which had experienced recent operating losses. There was also
uncertainty over the new PPI management team's ability to manage
effectively. The HealthFirst Board concluded that the synergies associated
with the Merger outweighed management concerns resulting from the business
combination with Corvallis Clinic and Medford Clinic.
- CAPITAL NEEDS: The HealthFirst Board's conclusion that a capital equity
partner was required in order for HealthFirst to meet future capital
requirements needed to sustain continued growth and
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competitiveness. The HealthFirst Board perceived increasingly adverse
market conditions stemming from the competitive environment for attracting
and retaining quality physicians and medical groups. Merger and
acquisition activities, as well as direct employment of primary care
physicians by local hospitals, had all been on the rise. In addition, one
national PPM had already created competition for HealthFirst as a
potential merger candidate with another medical group in the market. By
merging with entities outside of its geographic market, HealthFirst could
address its need to expand in order to attract managed care providing
without additional recruitment in Portland, Oregon, or incurring the
expense of opening up new offices in more distant locations. The
HealthFirst Board considered questions concerning competition for limited
PPI capital resources among the New PCs after the Merger. The HealthFirst
Board believed, however, that financially justifiable capital investments
could be recommended to PPI and endorsed for funding. The HealthFirst
Board concluded that the potential need to compete and justify future
capital needs was outweighed by the new business discipline that would
apply to all of the New PCs to the analysis of future capital needs.
- ACCESS TO CAPITAL: The HealthFirst Board's conclusion that PPI, as the
combined entity, would have a significant base of shareholders, providers,
geography and equity and, thus, an advantageous position for obtaining
capital. The Merger enhances the possibility that shareholders would hold
securities traded on a national securities exchange in the future. If the
shares of PPI Class A Common Stock were publicly traded, the stockholders
of PPI, including the current shareholders of HealthFirst, would enjoy
more liquidity in their investment and greater potential for maximizing
long-term shareholder return (although the HealthFirst Board understood
there could be no assurance that PPI securities would be so traded).
Although the HealthFirst Board realized that in the short term the
Management Fee would likely reduce physician employer income, the
HealthFirst Board determined that the overriding factor was that the
Merger would greatly enhance HealthFirst's access to capital. This factor
weighed strongly in the HealthFirst Board's overall decision to recommend
the Merger Proposal.
- GEOGRAPHIC COVERAGE: The HealthFirst Board's belief that the broader
geographic coverage and improved access for patients of HMOs and larger
purchaser groups offered by PPI would allow it to better compete in a
managed care environment and would improve growth in covered lives. The
HealthFirst Board was concerned about the possibility that the formation
of PPI would attract greater competition from other PPMs and hospitals in
HealthFirst's and other Companies' service areas. The HealthFirst Board
was also concerned about potential difficulties for PPI in attempting to
satisfy the differing and sometimes conflicting needs of the Portland
market compared to that of Corvallis or Medford. Specific concern was
expressed regarding relationships with payors. If, for example, PPI
pressured a payor in one of PPI's markets, there could be a backlash in
such payor's relationship with HealthFirst. The HealthFirst Board
concluded, however, that it was more likely that HealthFirst would instead
achieve greater leverage and opportunity by virtue of greater geographic
coverage.
- PHYSICIAN LEADERSHIP: The HealthFirst Board's belief that the ability of
PPI to provide leadership by physicians in both governance and clinical
program development of PPI would enhance HealthFirst's ability to provide
better clinical care for patients and compete in both managed care and
fee-for-service markets. During the HealthFirst Board's deliberations,
concern was expressed regarding the structure of physician leadership and
whether HealthFirst's medical director would be distracted by the larger
needs of PPI. In addition, the HealthFirst Board was concerned that
outside leadership might change positive features of the governance of
HealthFirst. Nonetheless, after becoming acquainted with the leaders of
the other entities and their values, the HealthFirst Board concluded that
PPI's physician leadership component provided a strong reason to recommend
the Merger Proposal.
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- EMPLOYEE BENEFITS: The HealthFirst Board's belief that the Merger would
enhance the workplace for its employees and future employees of
HealthFirst New PC by allowing the ability to transfer among locations
without losing seniority or benefits and, for its provider-employees, by
providing eligibility for ownership of PPI through stock option plans.
Significant concern was expressed, however, that employees might lose
benefits which they presently have at HealthFirst as a result of the
Merger.
- FAIR VALUE AND OTHER TERMS: The HealthFirst Board's conclusion that the
consideration to be received by the shareholders of HealthFirst pursuant
to the Merger and other terms of the Reorganization and Merger Agreement
are fair to, and in the best interests of, HealthFirst and its
shareholders. The HealthFirst Board determined that the respective FTE of
each Company represented a fair and reasonable basis for allocation of
shares of PPI Class A Common Stock to be issued by PPI as a consideration
in the Merger. The HealthFirst Board believed that the relative economic
value of each of the Companies derives from the capacity of such Company
to generate revenues for the combined entity, PPI. The HealthFirst Board
determined that such capacity was best measured by reference to the number
of FTE providers employed by a Company. The provision of the
Reorganization and Merger Agreement permitting a distribution to
shareholders by HealthFirst if HealthFirst's net equity per FTE exceeded
that of either of the other Companies by a specified threshold amount was
also considered significant. The HealthFirst Board deemed unnecessary to
engage an outside advisor to confirm the fairness of the consideration in
the Merger to be received by the shareholders of HealthFirst in the
Merger. The HealthFirst Board did not consider engaging an outside party
to determine whether the exchange ratio and other terms of the New PC
Reorganization and the Merger were fair to HealthFirst shareholders.
- TAX CONSEQUENCES: The HealthFirst Board's conclusion that the structure of
the Merger would permit the holders of HealthFirst Class A Shares to
exchange their shares for PPI Class A Common Stock on a tax-free basis.
HealthFirst has received an opinion from McDermott, Will & Emery, counsel
to PPI and each of the Companies, that, upon the basis of certain assumed
and described facts, it is more likely than not that the Merger will
constitute a tax-free transaction. See "Terms of the Reorganization and
Merger--Federal Income Tax Considerations."
In light of the factors described above, the HealthFirst Board concluded
that the Merger was fair to, and in the best interests of, HealthFirst and its
shareholders. The HealthFirst Board found that the potential negative effects of
the Merger were outweighed by the positive factors and, thus, that such positive
factors were persuasive in recommending approval of the Merger Proposal to the
shareholders of HealthFirst.
HEALTHFIRST BOARD'S RECOMMENDATION
The HealthFirst Board believes that the Merger and the terms of the
Reorganization and Merger Agreement are fair to, and in the best interests of,
HealthFirst and its shareholders and has thus unanimously approved the Merger
Proposal. THE HEALTHFIRST BOARD UNANIMOUSLY RECOMMENDS THAT HEALTHFIRST
SHAREHOLDERS VOTE IN FAVOR OF THE MERGER PROPOSAL.
CORVALLIS CLINIC'S REASONS FOR THE MERGER
At a meeting held on July 18, 1996, the Corvallis Clinic Board, with the
assistance of Corvallis Clinic's outside legal counsel, considered the terms and
structure of the Merger and the related transactions and reviewed the legal,
financial and other ramifications of the Merger and the related transactions. At
a meeting held on July 24, 1996, the Corvallis Clinic Board unanimously adopted
the Merger Proposal and the other Proposals. The Merger Proposal was adopted
because it appeared to allow Corvallis Clinic physicians the maximum opportunity
to retain physician control over Corvallis Clinic while adjusting its
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business structure to align with a marketplace requiring an increased ability to
negotiate with managed care payors and to raise capital. Such factors were more
important to the Corvallis Clinic Board than the attainment of specified cost
savings through the Merger. The Corvallis Clinic Board agreed to forego
exploring proposals from other parties for a specified period of time and
accepted the risk of incurring a break-up fee in order to move ahead with merger
discussions with HealthFirst and Medford Clinic on a mutually concentrated and
focused basis. The Corvallis Clinic Board determined that it was appropriate to
do so based on its perception of the marked potential advantages of the proposed
business combination with HealthFirst and Medford Clinic.
No outside consultants were engaged by the Corvallis Clinic Board to analyze
the relative values of the Companies for purposes of determining the allocation
of shares of PPI Class A Common Stock because the Corvallis Clinic Board
believed that it, together with management of HealthFirst and Medford Clinic,
could agree upon proposals that would mutually benefit the shareholders of each
of the Companies and also felt positive about the methodology ultimately adopted
regarding Merger consideration. The Corvallis Clinic Board did engage an outside
party to aid it in setting an exchange ratio that would fairly allocate the
value of PPI among the Corvallis Clinic Class A, Class B and Class C
shareholders for the limited purpose of determining the appropriate allocation
of the aggregate number of shares of PPI Class A Common Stock to be received
among the holders of Corvallis Clinic Class A Stock, Corvallis Clinic Class B
Stock and Corvallis Clinic Class C Stock. A more specific description of the
material factors considered by the Corvallis Clinic Board in reaching its
decision to adopt the Merger Proposal rather than other alternatives, is set
forth below.
- ACCESS TO CAPITAL: The Corvallis Clinic Board's recognition that in order
to be competitive and to continue to expand in its market area, access to
capital would be critical. The Corvallis Clinic Board believed that the
combined entity could have a greater base of shareholders and a stronger
capital structure, enhancing the likelihood that the capital stock of the
combined entity would be listed on a national securities exchange
(although the Corvallis Clinic Board understood there could be no
assurance that PPI securities would be so listed). Thus, a combined entity
would have a significantly better chance of acquiring capital for the
future than Corvallis Clinic alone. Further, the Corvallis Clinic Board
believed that, due in part to the recent operating losses incurred by
Corvallis Clinic, future access to capital would be increasingly costly
and difficult to obtain. Therefore, this factor was very significant in
the Corvallis Clinic's Board's recommendation of the Merger.
- SYNERGIES: The Corvallis Clinic Board's belief that, because of the
uniqueness and synergy of the three Companies, the Merger would have a
positive impact on profitability. Significant economies of scale and
financial benefits are anticipated from consolidation of the operations of
the Companies in many areas, including business insurance, purchasing and
employee benefits. The Corvallis Clinic Board expects the combined entity
to have an enhanced negotiating posture with local hospitals and
state-wide HMOs. The Corvallis Clinic Board further perceived an
opportunity, as a result of the Merger, for PPI to build on the strengths
of each of the three combining Companies across a variety of business and
clinical operations which would benefit Corvallis Clinic and its
shareholders. One issue of concern was the effect of the natural
geographic boundaries which limit Corvallis Clinic's growth. In the event
that PPI were to acquire additional hubs in Eugene and in Salem, Oregon,
Corvallis Clinic could be adversely affected. In weighing its concerns,
the Corvallis Clinic Board determined that such limitations and
possibilities would exist whether or not Corvallis Clinic were to
consummate the Merger and that, in any event, the synergies resulting from
the Merger would outweigh the possible downside.
- QUALITY OF KEY PERSONNEL: The Corvallis Clinic Board's belief that,
because of the size and similarity of the Companies, there may be a
distinct benefit created by enabling each Company to share its strengths
and management expertise with the other Companies. The Corvallis Clinic
Board considered, in connection with the Merger, the impact of losing the
services of its chief financial officer to PPI. Such concern was mitigated
by the notion that such officer would still be available,
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albeit on a more limited basis, to serve as a resource to Corvallis Clinic
and its shareholders. The Corvallis Clinic Board believed that the
benefits to Corvallis Clinic of the proposed Merger clearly outweighed
such loss.
- EMPLOYEE BENEFITS: The Corvallis Clinic Board's belief that the Merger
would enhance the workplace for its employees and future employees of
Corvallis Clinic New PC by allowing the ability to transfer among offices
without losing seniority or benefits and would offer its
physician-employees eligibility for stock option plans of PPI.
- FAIR VALUE: The Corvallis Clinic Board's conclusion that the consideration
to be received by the shareholders of Corvallis Clinic pursuant to the
Merger was not only fair to such shareholders but better than other
alternatives it reviewed. Looser affiliations among the Companies and
transactions with other entities had been explored as alternatives at
various times. The Corvallis Clinic Board determined that the respective
FTE of each Company represented a fair and reasonable basis for allocation
of shares of PPI Class A Common Stock to be issued by PPI as a
consideration in the Merger. The Corvallis Clinic Board believed that the
relative economic value of each of the Companies derives from the capacity
of such Company to generate revenues for the combined entity, PPI. The
Corvallis Clinic Board determined that such capacity was best measured by
reference to the number of FTE providers employed by a Company. The
provision of the Reorganization and Merger Agreement permitting a
distribution to shareholders by Corvallis Clinic if such Corvallis
Clinic's net equity per FTE exceeded that of either of the other Companies
by a specified threshold amount was also considered significant. The
Corvallis Clinic Board deemed unnecessary to engage an outside advisor to
confirm the fairness of the consideration in the Merger to be received by
the shareholders of Corvallis Clinic Board in the Merger. The following
methodology was used by the Corvallis Clinic Board to allocate the shares
among the three classes of Capital Stock of Corvallis Clinic as follows:
(i) the number of shares of PPI Class A Common Stock into which each share
of Corvallis Clinic Class A Stock and each share of Corvallis Clinic Class
B Stock will be converted pursuant to the merger represents that number
having aggregate value of $23,000 and $100, respectively, the value of
each share of PPI Class A Common Stock being based on the valuation
prepared by American Appraisal Associates, Inc. (an independent valuation
firm selected by Corvallis Clinic pursuant to the Reorganization and
Merger Agreement) of the Companies as a combined entity, assuming such
combination as of June 30, 1996, and (ii) the number of shares of PPI
Class A Common Stock into which each share of Corvallis Clinic Class B
Stock will be converted pursuant to the Merger is equal to the quotient
obtained by dividing (A) 12,035 (the number of all issued and outstanding
shares of Corvallis Clinic Class B Stock at the Effective Time) into (B)
1,960,248 (the excess of 2,099,250 (the aggregate number of shares of PPI
Class A Common Stock which Corvallis Clinic shareholders will be entitled
to receive as consideration in the Merger) over 139,002 (the aggregate
number of PPI Class A Common Stock into which all of the issued and
outstanding shares of Corvallis Clinic Class A Stock and Corvallis Clinic
Class C Stock will be converted under footnote 1 above)).
- TAX CONSEQUENCES: The Corvallis Clinic Board's conclusion that the
structure of the Merger would permit the holders of each of Corvallis
Clinic Class A Stock, Corvallis Clinic Class B Stock and Corvallis Clinic
Class C Stock to exchange their shares for shares of PPI Class A Common
Stock on a tax-free basis. Corvallis Clinic has received an opinion from
McDermott, Will and Emery, counsel to PPI and each of the Companies, that,
upon the basis of certain assumed and described facts, it is more likely
than not that the Merger will constitute a tax-free transaction (See
"Terms of the Reorganization and Merger--Federal Income Tax
Considerations").
In light of the factors noted above, the Corvallis Clinic Board concluded
that the Merger is fair to, and in the best interests of, Corvallis Clinic and
its shareholders.
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CORVALLIS CLINIC BOARD'S RECOMMENDATION
The Corvallis Clinic Board believes that the Merger and the terms of the
Reorganization and Merger Agreement are fair to, and in the best interests of,
Corvallis Clinic and its shareholders and has, thus, unanimously approved the
Merger Proposal. THE CORVALLIS CLINIC BOARD UNANIMOUSLY RECOMMENDS THAT
CORVALLIS CLINIC SHAREHOLDERS VOTE IN FAVOR OF THE MERGER PROPOSAL.
MEDFORD CLINIC'S REASONS FOR THE MERGER
In the fall of 1995, Medford Clinic embarked on a strategic planning process
which identified several priorities for the future of Medford Clinic. First and
foremost was the conclusion that in order to thrive in the managed care era and
to deal successfully with the challenges of the future, Medford Clinic would
need a strategic capital partner. Medford Clinic systematically identified and
prioritized potential partners, including hospital systems, health plans and
practice management companies. In the spring of 1996, several potential partners
were considered. At the same time, discussions with HealthFirst and Corvallis
Clinic were in progress. By late spring of 1996, Medford Clinic had concluded
that the interests of Medford Clinic were best served by a merger of the three
Companies and formation of PPI as a PPM. The interests of the Medford Clinic
Board in maintaining local autonomy and control were instrumental in its
determination to commit to a period of exclusive negotiations with HealthFirst
and Corvallis Clinic.
At a meeting held on July 22, 1996, the Medford Clinic Board, with the
assistance of Medford Clinic's legal advisors, considered the terms and
structure of the Merger and related transactions and reviewed the legal,
financial and strategic ramifications of the Merger and related transactions. At
a meeting held on July 25, 1996, the Medford Clinic Board and management team
reached a unanimous decision to adopt the Merger Proposal for the following
reasons:
- GROWTH REQUIREMENTS: The Medford Clinic Board's recognition of the need to
expand both the provider base and the supporting facilities. New satellite
clinics in Medford Clinic's service area as well as expansion of current
facilities would be needed to meet patient needs. Capital would be
required to fund those expansions.
- MANAGED CARE INFRASTRUCTURE: The Medford Clinic Board's recognition that
the increasing requirements for sophisticated information systems, data
analysis, contract negotiation, utilization review, quality assurance and
monitoring and outcome analysis demand increasingly complex and expensive
technologies. Expected capital expenditures were not quantified by or for
the Medford Clinic Board during its evaluation of the Merger. Nonetheless,
the Medford Clinic Board determined that economies of scale in sharing
costs and benefits of such infrastructure with similar multi-specialty
medical groups made strategic and financial sense.
- GEOGRAPHIC COVERAGE: The Medford Clinic Board's belief that the strategic
locations of Medford Clinic, HealthFirst and Corvallis Clinic throughout
Oregon provide solid geographic coverage which will create strategic
advantages with payors and health plans. The Medford Clinic Board
considered the possible negative impact to the Medford market of potential
actions which PPI might take in Portland or Corvallis, focusing
particularly on possible disruption of Medford Clinic's relationship with
payors and hospitals. The Medford Clinic Board determined that the
leverage and strength gained by expansion of Medford Clinic's geographic
coverage outweighed any such potential problems.
- ACCESS TO CAPITAL: The Medford Clinic Board's belief that the Merger
creates a potential opportunity to access capital on terms more favorable
than those available to any of the three Companies separately.
- SIMILAR CULTURES: The Medford Clinic Board's belief that the health care
systems most likely to be successful in the future are those that combine
physician clinically-oriented leadership and values
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with expert business management in a collaborative way. Medford Clinic,
HealthFirst and Corvallis Clinic each have at minimum a 50-year tradition
of successful delivery of health care in their respective communities. The
cultures of the three Companies in terms of values, style of practice and
governance are perceived as similar.
- ECONOMIES OF SCALE: The Medford Clinic Board's belief that the Merger, by
affording the consolidation of various systems among the Companies (such
as human resources, information systems, managed care contracting, review
and monitoring functions, supply acquisition, insurance, credentialing,
accounting and billing) would achieve significant cost savings (though
such cost savings have not been quantified).
- COMPETITION: The Medford Clinic Board's conclusion that the Merger and the
subsequent operation of PPI as a combined entity resulting from the Merger
represented the best alternative to enhance Medford Clinic's ability to
compete and grow in the competitive environment of Southern Oregon and,
potentially, in Northern California. The Medford Clinic was increasingly
concerned about the acquisition of physician practices and development of
physician hospital organizations ("PHOs") by local hospitals.
- QUALITY OF KEY PERSONNEL: The Medford Clinic Board's belief that the
merged entity, by virtue of its size, strategic position and access to
capital, would be able to attract top level management personnel and
physician providers. The Medford Clinic Board was concerned about the
potential negative impact to its management of the loss of its Medical
Director and its Chief Financial Officer, each of whom has joined PPI's
corporate staff. The Medford Clinic Board believed that the reduced access
it would have to such individuals, who still would be able to work closely
with newly recruited staff in Medford, would be sufficient to ensure
adequate transition of their duties.
- REALIZATION OF EQUITY: The Medford Clinic Board recognized that the Merger
afforded an opportunity to further the equity interests of its
stockholders and concluded that their equity interests would be enhanced
over time with continued success of PPI.
- FAIR VALUE: The Medford Clinic Board concluded that the terms of the
Medford Clinic Reorganization Transactions and the Merger were fair to,
and in the best interests of, Medford Clinic's shareholders based upon the
aggregate value of shares of PPI Class A Common Stock that the Medford
Clinic shareholders would receive in the Merger under the proposed
exchange ratios. The Medford Clinic Board determined that the respective
FTE of each Company represented a fair and reasonable basis for allocation
of shares of PPI Class A Common Stock to be issued by PPI as a
consideration in the Merger. The Medford Clinic Board believed that the
relative economic value of each of the Companies derives from the capacity
of such Company to generate revenues for the combined entity, PPI. The
Medford Clinic Board determined that such capacity was best measured by
reference to the number of FTE providers employed by a Company. The
provision of the Reorganization and Merger Agreement permitting a
distribution to shareholders by Medford Clinic if such Medford Clinic's
net equity per FTE exceeded that of either of the other Companies by a
specified threshold amount was also considered significant. The Medford
Clinic Board deemed unnecessary to engage an outside advisor to confirm
the fairness of the consideration in the Merger to be received by the
shareholders of Medford Clinic in the Merger.
- TAX CONSEQUENCES: With respect to the tax consequences of the Merger,
Medford Clinic has received an opinion from McDermott, Will & Emery,
counsel to PPI and each of the Companies, that, upon the basis of certain
assumed and described facts, it is more likely than not that the Merger
will constitute a tax-free transaction (see "Terms of the Reorganization
and Merger-- Federal Income Tax Considerations").
The Medford Clinic Board considered all of these factors and weighed them
against the advantages and disadvantages of other available options. Because the
advantages of the Merger Proposal were
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believed to outweigh both its disadvantages and the advantages of competing
business alternatives, the Medford Clinic Board concluded that Medford Clinic's
shareholders were best served by proceeding with the terms of the Reorganization
and Merger Agreement. The Medford Clinic Board further concluded that the terms
expressed in the Reorganization and Merger Agreement are fair to and in the best
interests of, Medford Clinic and its shareholders.
The Medford Clinic Board did not rely significantly upon outside consultants
or legal advice in evaluating whether the Merger was in the best interests of
its shareholders. No outsiders evaluated the fairness of the transactions.
MEDFORD CLINIC BOARD'S RECOMMENDATION
The Medford Clinic Board believes that the Merger and the terms of the
Reorganization and Merger Agreement are fair to, and in the best interests of,
Medford Clinic and its shareholders and has unanimously approved the Merger
Proposal. THE MEDFORD CLINIC BOARD UNANIMOUSLY RECOMMENDS THAT MEDFORD CLINIC
SHAREHOLDERS VOTE IN FAVOR OF THE MERGER PROPOSAL.
FAILURE TO APPROVE THE MERGER
The combination of the operations of HealthFirst, Corvallis Clinic and
Medford Clinic is conditioned upon the approval of the Merger Proposal by the
respective shareholders of HealthFirst, Corvallis Clinic and Medford Clinic.
Without the consummation of the Merger, the Companies believe that the
initiative in the physician practice management business and the synergy created
by linking together the three significant and successful medical groups with
similar culture, management strategies and business plans will be lost.
Moreover, the Companies' common goal to develop a high-quality physician
services delivery system that will be managed by a centralized management
services entity with emphasis on cost-efficient provision of services will
suffer a setback. In addition, the Companies, and their shareholders indirectly,
have incurred and are expected to further incur substantial costs in an amount
estimated to be $3.5 million through the end of 1996 in connection with the
analysis, planning, documentation and approval process related to the Merger and
the PC Reorganization Transactions.
In the event that the shareholders of the Companies do not approve the
Merger and the PC Reorganization Transactions, a large portion of the
above-mentioned costs will be shared on a pro rata basis among the Companies in
accordance with the respective FTEs of the Companies under the Expense Sharing
Agreement, dated as of July 29, 1996, as amended and restated September 18, 1996
among HealthFirst, Corvallis Clinic, Medford Clinic and PPI (as so amended and
restated, the "Expense Sharing Agreement"). For the details on the terms and
conditions of the Expense Sharing Agreement, see "Terms of the Reorganization
and Merger--Expense Sharing Agreement." Common costs under the Expense Sharing
Agreement include, without limitation, payment of (i) certain severance
compensation and benefits to David M. Goldberg, M.H.A., Tim E. Dupell, C.P.A.
and Michael F. Bonazzola, M.D. under their respective employment agreements with
PPI and (ii) rent under a lease agreement, dated as of September 9, 1996,
between PPI, as tenant, and 111 SW Columbia Avenue, as landlord, for the lease
of the executive office of PPI for a term of seven years in the amount of $7,317
per month, increased annually based on increases in inflation. Each Company's
portion of all such costs and expenses arising from the failure of the Merger to
occur would be allocated pro rata in accordance with the number of full-time
equivalent physicians and other specified providers ("FTE") of such Company on
June 1, 1996, with full-time equivalence determined based on a workweek of at
least four full-working days.
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THE PC REORGANIZATION TRANSACTIONS AND RELATED TRANSACTIONS
GENERAL
The descriptions in this Joint Proxy Statement/Prospectus of the terms and
conditions of the PC Reorganization Proposal are qualified in their entirety by
reference to the copy of the Reorganization and Merger Agreement attached as
Appendix A to this Joint Proxy Statement/Prospectus, and to each of the other
Appendices to this Joint Proxy Statement/Prospectus, all of which are
incorporated herein by this reference.
The Reorganization and Merger Agreement contemplates that each of the
Companies will, as soon as practicable prior to the Merger:
(i) incorporate a New PC under the Oregon Professional Corporation Act;
(ii) transfer to such New PC certain of such Company's assets relating to
the provider professional services business of such Company, which
assets are expected to be intangible assets related to the practice of
medicine, including medical records, employment agreements with
providers and insurance contracts (collectively, the "New PC Assets"),
and cause such New PC to assume liabilities of such Company relating to
the New PC Assets (the "New PC Asset Transfer");
(iii) make a distribution under which the shareholders of such Company will
receive all of the issued and outstanding shares of capital stock of
such New PC, allocated on a pro rata basis in accordance with the fair
market value of each such shareholder's then-current equity interest in
such Company (except that the shareholders of Corvallis Clinic will
receive all of the issued and outstanding shares of capital stock of
Corvallis Clinic New PC on a one-to-one basis, whereby each such
shareholder will receive the same number of shares, with the same
designation of class of shares owned thereby in Corvallis Clinic) (such
transfer and distribution being referred to herein, collectively, as
the "New PC Distribution");
(iv) convert from an Oregon professional corporation to an Oregon business
corporation (such conversion being referred to herein as the "PC
Conversion") by filing Restated Articles of Incorporation, together
with the required fee, with the Secretary of State of the State of
Oregon in accordance with Oregon Law; and
(v) enter into the New PC Management Agreement with such New PC (all of the
foregoing transactions referred to herein, collectively, as the "PC
Reorganization Transactions").
It is contemplated that the PC Reorganization Transactions will occur as
soon as practicable after the HealthFirst Special Meeting, the Corvallis Clinic
Special Meeting and the Medford Clinic Special Meeting, and upon satisfaction or
waiver of all of the other applicable conditions set forth in the Reorganization
and Merger Agreement. The PC Reorganization Transactions are presently
anticipated to occur on or before December 31, 1996. The HealthFirst Board has
determined that the Merger is fair to, and in the best interests of, HealthFirst
and its shareholders for a number of reasons. See "The Merger and Related
Transactions--HealthFirst's Reasons for the Merger."
HEALTHFIRST'S REASONS FOR THE HEALTHFIRST REORGANIZATION TRANSACTIONS
In reaching its decision to approve the HealthFirst Reorganization
Transactions, the HealthFirst Board recognized that the PC Reorganization
Transactions are structured so as to comply with the requirements of the Oregon
Professional Corporation Act which prohibit a professional corporation from
merging into a business corporation and which restrict non-physician ownership
or control of a medical practice. The incorporation of HealthFirst New PC allows
the shareholders of HealthFirst to continue as shareholders of a professional
corporation and the conversion of HealthFirst from a professional corporation to
a business corporation enables the Companies to consummate the Merger. The
HealthFirst Board also took into consideration the fact that the New PC
Distribution by HealthFirst would, more likely than not, constitute a tax-free
transaction. The HealthFirst Board determined that there was no better
alternative to achieving the two goals of (i) complying with Oregon law in
consummating the Merger and (ii) enabling the shareholders to maintain an equity
interest in a professional corporation.
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The HealthFirst Board also recognized that the consummation of the business
combination contemplated by the Reorganization and Merger Agreement is
predicated upon (i) the formation of PPI as a physician practice management
company and HealthFirst New PC as the medical group and (ii) the creation of a
contractual relationship between the two companies under the HealthFirst
Management Agreement. The HealthFirst Reorganization Transactions enable the
shareholders of HealthFirst to maintain their own culture and identity even
after the Merger by retaining an equity interest in HealthFirst New PC. In
addition, the transfer of the provider professional services business followed
by New PC Distribution by HealthFirst is necessary to comply with Oregon law
restrictions on non-physician ownership or control of a medical office. The
HealthFirst Board concluded that the HealthFirst Reorganization Transactions are
necessary to the consummation of the Merger and are fair to, and in the best
interest of, HealthFirst and its shareholders.
HEALTHFIRST BOARD'S RECOMMENDATION
The HealthFirst Board believes that the HealthFirst Reorganization
Transactions and the terms of the Reorganization and Merger Agreement are fair
to, and in the best interests of, HealthFirst and its shareholders and has
unanimously approved the HealthFirst Reorganization Proposal. THE HEALTHFIRST
BOARD UNANIMOUSLY RECOMMENDS THAT HEALTHFIRST SHAREHOLDERS VOTE IN FAVOR OF THE
HEALTHFIRST REORGANIZATION PROPOSAL.
CORVALLIS CLINIC'S REASONS FOR THE CORVALLIS CLINIC REORGANIZATION TRANSACTIONS
The Corvallis Clinic Board has determined that the Merger is fair to, and in
the best interests of, Corvallis Clinic and its shareholders for a number of
reasons. See "The Merger and Related Transactions--Corvallis Clinic's Reasons
for the Merger." In reaching its decision to approve the Corvallis Clinic
Reorganization Transactions, the Corvallis Clinic Board recognized that the PC
Reorganization Transactions are structured so as to comply with the requirements
of the Oregon Professional Corporation Act which prohibit a professional
corporation from merging into a business corporation and which restrict non-
physician ownership or control of a medical practice. The incorporation of
Corvallis Clinic New PC allows the shareholders of Corvallis Clinic to continue
as shareholders of a professional corporation and the conversion of Corvallis
Clinic from a professional corporation to a business corporation enables the
Companies to consummate the Merger. The Corvallis Clinic Board also took into
consideration the fact that the New PC Distribution by Corvallis Clinic would,
more likely than not, constitute a tax-free transaction. The Corvallis Clinic
Board determined that there was no better alternative to achieving the two goals
of (i) complying with Oregon law in consummating the Merger and (ii) enabling
the shareholders to maintain an equity interest in a professional corporation.
The Corvallis Clinic Board also recognized that the consummation of the
business combination contemplated by the Reorganization and Merger Agreement is
predicated upon (i) the formation of PPI as a physician practice management
company and Corvallis Clinic New PC as the medical group and (ii) the creation
of a contractual relationship between the two companies under the Corvallis
Clinic Management Agreement. The Corvallis Clinic Reorganization Transactions
enable the shareholders of Corvallis Clinic to maintain their own culture and
identity even after the Merger by retaining an equity interest in Corvallis
Clinic New PC. In addition, the transfer of the provider professional services
business followed by New PC Distribution by Corvallis Clinic is necessary to
comply with Oregon law restrictions on non-physician ownership or control of a
medical practice. The Corvallis Clinic Board concluded that the Corvallis Clinic
Reorganization Transactions are necessary to the consummation of the Merger and
are fair to, and in the best interest of, Corvallis Clinic and its shareholders.
CORVALLIS CLINIC BOARD'S RECOMMENDATION
The Board of Corvallis Clinic believes that the Corvallis Clinic
Reorganization Transactions and the terms of the Reorganization and Merger
Agreement are fair to, and in the best interests of, Corvallis Clinic and its
shareholders and has unanimously approved the Corvallis Clinic Reorganization
Proposal. THE CORVALLIS CLINIC BOARD UNANIMOUSLY RECOMMENDS THAT CORVALLIS
CLINIC
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SHAREHOLDERS VOTE IN FAVOR OF THE CORVALLIS CLINIC REORGANIZATION PROPOSAL.
MEDFORD CLINIC'S REASONS FOR THE MEDFORD CLINIC REORGANIZATION TRANSACTIONS
The Medford Clinic Board has determined that the Merger is fair to, and in
the best interests of, Medford Clinic and its shareholders for a number of
reasons. See "The Merger and Related Transactions--Medford Clinic's Reasons for
the Merger." In reaching its decision to approve the Medford Clinic
Reorganization Transactions, the Medford Clinic Board recognized that the PC
Reorganization Transactions are structured so as to comply with the requirements
of the Oregon Professional Corporation Act which prohibit a professional
corporation from merging into a business corporation and which restrict non-
physician ownership or control of a medical practice. The incorporation of
Medford Clinic New PC allows the shareholders of Medford Clinic to continue as
shareholders of a professional corporation and the conversion of Medford Clinic
from a professional corporation to a business corporation enables the Companies
to consummate the Merger. The Medford Clinic Board also took into consideration
the fact that the New PC Distribution by Medford Clinic would, more likely than
not, constitute a tax-free transaction. The Medford Clinic Board determined that
there was no better alternative to achieving the two goals of (i) complying with
Oregon law in consummating the Merger and (ii) enabling the shareholders to
maintain an equity interest in a professional corporation.
The Medford Clinic Board also recognized that the consummation of the
business combination contemplated by the Reorganization and Merger Agreement is
predicated upon (i) the formation of PPI as a physician practice management
company and Medford Clinic New PC as the medical group and (ii) the creation of
a contractual relationship between the two companies under the Medford Clinic
Management Agreement. The Medford Clinic Reorganization Transactions enable the
shareholders of Medford Clinic to maintain their own culture and identity even
after the Merger by retaining an equity interest in Medford Clinic New PC. In
addition, the transfer of the provider professional services business followed
by the New PC Distribution by Medford Clinic is necessary to comply with Oregon
law restrictions on non-physician ownership or control of a medical practice.
The Medford Clinic Board concluded that the Medford Clinic Reorganization
Transactions are necessary to the consummation of the Merger and are fair to,
and in the best interest of, Medford Clinic and its shareholders.
MEDFORD CLINIC'S BOARD RECOMMENDATION
The Medford Clinic Board believes that the Medford Clinic Reorganization
Transactions and the terms of the Reorganization and Merger Agreement are fair
to, and in the best interests of, Medford Clinic and its shareholders and has
unanimously approved the Medford Clinic Reorganization Proposal. THE MEDFORD
CLINIC BOARD UNANIMOUSLY RECOMMENDS THAT MEDFORD CLINIC SHAREHOLDERS VOTE IN
FAVOR OF THE MEDFORD CLINIC REORGANIZATION PROPOSAL.
FAILURE TO APPROVE THE PC REORGANIZATION TRANSACTIONS
The consummation of the Merger is conditioned upon the approval of the
HealthFirst Reorganization Proposal, the Corvallis Clinic Reorganization
Proposal, and the Medford Reorganization Proposal by the respective shareholders
of HealthFirst, Corvallis Clinic and Medford Clinic. The consequences of the
failure of the shareholders of HealthFirst to approve the HealthFirst
Reorganization, the failure of shareholders of Corvallis Clinic to approve the
Corvallis Clinic Reorganization Proposal, or the failure of the shareholders of
Medford Clinic to approve the Medford Reorganization Proposal are similar to
those described in "The Merger and Related Transactions--Failure to Approve the
Merger."
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TERMS OF THE REORGANIZATION AND MERGER
The Reorganization and Merger Agreement was entered into by and among PPI,
HealthFirst, Corvallis Clinic and Medford Clinic on July 29, 1996, following
approval by each of their boards of directors, and subsequently amended and
restated on September 19, 1996 and further amended on November 4, 1996. Pursuant
to the terms of the Reorganization and Merger Agreement, HealthFirst, Corvallis
Clinic and Medford Clinic will merge with and into PPI. Descriptions of the
Reorganization and Merger Agreement set forth below provide a discussion of all
material terms thereof and are qualified in their entirety by reference to the
Reorganization and Merger Agreement set forth as Appendix A hereto and
incorporated herein by this reference.
CLOSING AND EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the completion of the filing of a
properly executed Certificate of Merger with the Secretary of State of the State
of Delaware reflecting the Merger, which filing will be made after satisfaction
of certain conditions set forth in the Reorganization and Merger Agreement. See
"Conditions of the Reorganization and Merger Agreement" below.
CONDITIONS OF THE REORGANIZATION AND MERGER AGREEMENT
Conditions to the closing of the Reorganization and Merger Agreement
include, but are not limited to, the following:
1. SHAREHOLDER APPROVAL. The Reorganization and Merger Agreement and
the transactions contemplated hereby (including, without limitation, the PC
Reorganization Transactions and the Merger Transactions) shall have been
approved and adopted by the affirmative vote of the holders of (a) a
majority of the outstanding HealthFirst Class A Shares, (b) two-thirds of
the outstanding shares of Corvallis Clinic Class A Stock and two-thirds of
the outstanding shares of Corvallis Clinic Class B Stock, in each case as a
separate voting group, and (c) a majority of the outstanding shares of
Medford Clinic Common Stock.
2. REGISTRATION STATEMENT. The SEC shall have declared the
Registration Statement effective, no stop order suspending the effectiveness
of the Registration Statement or any part thereof shall have been issued and
no proceeding for that purpose or similar proceeding in respect of the Joint
Proxy Statement/Prospectus, shall have been initiated or threatened in
writing by the SEC.
3. NO INJUNCTION OR ORDER. No preliminary or permanent injunction or
other order by any federal, state or foreign court of competent jurisdiction
which prohibits the consummation of the Merger shall have been issued and
remain in effect.
4. INCENTIVE COMPENSATION PLANS. PPI shall have taken all necessary
action to adopt the Physician Partners, Inc. Employee Option Plan, the
Physician Partners, Inc. Non-Employee Director Option Plan, the Physician
Partners, Inc. Non-Employee Provider Option Plan and the Physician Partners,
Inc. Change in Control Plan.
5. RIGHTS AGREEMENT. PPI shall have taken all necessary action to
adopt a rights agreement for a dividend distribution of one right to
purchase a certain number of shares of a class of preferred stock of PPI for
each share of PPI Common Stock.
6. TAX OPINION. PPI and each of the Companies shall have received the
opinion of counsel with such assumptions and qualifications as are
reasonably satisfactory to the Companies, based on certificates of the
Companies as requested by counsel to the effect that the Merger will, more
likely than not, be treated for federal income tax purposes as a
"reorganization" within the meaning of Section 368 of the Code.
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7. APPROVALS; PROVIDER NUMBERS. Each of HealthFirst New PC, Corvallis
Clinic New PC and Medford Clinic New PC shall have obtained approvals,
licenses and provider numbers from all governmental authorities, in form and
substance reasonably satisfactory to the Companies, necessary or appropriate
for the operation following the Effective Time of the respective businesses
of HealthFirst, Corvallis Clinic and Medford Clinic as currently operated
thereby, including the receipt of confirmation from all applicable
governmental agencies that at the Effective Time all licenses required by
law to operate such businesses as currently operated will be transferred to,
or reissued in the name of HealthFirst New PC, Corvallis Clinic New PC and
Medford Clinic New PC, as the case may be. Further, each of HealthFirst New
PC, Corvallis Clinic New PC and Medford Clinic New PC shall have received
approvals, consents or commitments satisfactory to the Companies from
Medicare and other third-party payors of certification effective as of the
Effective Time for the participation by HealthFirst New PC, Corvallis Clinic
New PC and Medford Clinic New PC in each such program and the right of
HealthFirst New PC, Corvallis Clinic New PC and Medford Clinic New PC to
receive reimbursement with respect thereto.
8. PC REORGANIZATION TRANSACTIONS. The Articles of Incorporation of
the Companies as restated after the Merger shall have been made effective
and the PC Reorganization Transactions shall have been consummated in
accordance with Oregon Law.
9. MANAGEMENT AGREEMENTS. HealthFirst shall have entered into the
HealthFirst Management Agreement with HealthFirst New PC; Corvallis Clinic
shall have entered into the Corvallis Clinic Management Agreement with
Corvallis Clinic New PC; Medford Clinic shall have entered into the Medford
Clinic Management Agreement with Medford Clinic New PC.
10. DISSENTING SHAREHOLDERS. The aggregate number of shares held by
shareholders of each of the Companies dissenting from the Merger and
exercising their dissenters' rights to demand fair value of such shares in
accordance with the provisions of Section 60.554 of the Oregon Business
Corporation Act shall not exceed 15% of all issued and outstanding shares of
capital stock of such Company.
CONDUCT OF BUSINESSES OF COMPANIES PENDING THE MERGER
During the period from the date of the Reorganization and Merger Agreement
until the Effective Time, each of the Companies is generally required to conduct
its operations only in the ordinary course of business and consistent with past
practice. However, in the event (i) the quotient obtained by dividing (A) the
FTE of Corvallis Clinic, the FTE of HealthFirst or the FTE of Medford Clinic as
of June 1, 1996 into (B) the excess of total assets over total liabilities of
Corvallis Clinic, HealthFirst or Medford Clinic, as applicable (such Company's
"FTE Net Shareholder Equity"), as reflected on the balance sheet thereof as at
June 30, 1996, reviewed by Arthur Andersen LLP, which reviewed balance sheet
shall be adjusted (except in the case of HealthFirst) to reflect the fair market
value of any real estate, exceeds (ii) the FTE Net Shareholder Equity of any
other Company by more than 20 percent (the "Minimum Net Equity Threshold"), such
Company may make a distribution to its shareholders in an amount equal to the
product of (y) the amount of such excess of such Company's FTE Net Shareholder
Equity over the Minimum Net Equity Threshold multiplied by (z) such Company's
FTE as of June 1, 1996.
The Reorganization and Merger Agreement also provides that the cumulative
amount of obligations incurred by each of the Companies under any contract,
agreement commitment or arrangement in the ordinary course of business (i) after
December 1, 1995 through the Effective Time shall not, without the prior
approval of PPI and the other Companies, exceed $1,300,000 in the case of
Corvallis Clinic and (ii) after January 1, 1996 through the Effective Time shall
not, without the prior approval of PPI and the other companies, exceed
$4,300,000 in the case of HealthFirst and $1,600,000 in the case of Medford
Clinic.
In addition, the cumulative amount of compensations and benefits received by
providers employed by each of the Companies in the ordinary of course of
business (i) after December 1, 1995 through the
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Effective Time shall not, without the prior approval of PPI and the other
Companies, exceed $12,500,000 in the case of Corvallis Clinic and (ii) after
January 1, 1996 through the Effective Time shall not, without the prior approval
of PPI and the other Companies, exceed $20,000,000 in the case of HealthFirst or
$12,500,000 in the case of Medford Clinic.
TERMINATION OF THE REORGANIZATION AND MERGER AGREEMENT
TERMINATION EVENT
The Reorganization and Merger Agreement may be terminated prior to the
Effective Time upon certain occurrences, including, without limitation, the
following:
1. By written consent of all of the parties.
2. By any party (referred to herein as the "Notice Party") if there
shall have been any material breach of a material obligation of any other
party (referred to herein as the "Breaching Party") thereunder and, if such
breach is curable, such default shall have not been remedied within 10 days
after receipt by the Breaching Party of notice in writing from the Notice
Party specifying such breach and requesting that such breach be remedied;
provided, however, that such 10-day period shall be extended for so long as
the Breaching Party shall make diligent attempts to cure such default and
such default remains curable.
3. By any party if the board of directors of such party shall have (i)
determined, in the exercise of its fiduciary duties under applicable law,
not to recommend the Reorganization and Merger Agreement, the applicable PC
Reorganization or the Merger or shall have withdrawn such recommendation or
(ii) resolved to do any of the foregoing.
4. By any party if any court of competent jurisdiction in the United
States or any governmental authority shall have issued an order, decree or
ruling or taken any other action restraining, enjoining or otherwise
prohibiting any PC Reorganization or the Merger and such order, decree,
ruling or other action shall have become final and non-appealable.
5. By any party upon written notice to the other Parties if any
approval of the shareholders of such party required for the consummation of
the transactions submitted for their approval shall not have been obtained
by reason of the failure to obtain the required vote at a duly-held meeting
of shareholders or at any adjournment thereof.
6. By any party if the Effective Time shall not have taken place on or
before January 31, 1997 (which date may be extended by agreement of the
Parties hereto), unless the party desiring to so terminate pursuant to this
provision is in default under the Reorganization and Merger Agreement.
BREAK-UP FEE
If the Reorganization and Merger Agreement is terminated as a result of any
material breach of a material obligation of any party or if the board of
directors of any Company shall have determined not to recommend the
Reorganization and Merger Agreement, then in such event, such party shall
forthwith pay to each of the other Companies a breakup fee in an amount equal to
all costs and expenses incurred by each such Company or on its behalf in
connection with or related to the authorization, preparation, negotiation,
execution and performance of the Reorganization and Merger Agreement and all
other matters related to the consummation of the transactions comtemplated
thereby.
EXPENSE SHARING AGREEMENT
HealthFirst, Corvallis Clinic and Medford Clinic entered into the Expense
Sharing Agreement in order to share in the payment of certain costs and expenses
incurred in connection with the transactions contemplated by the Reorganization
and Merger Agreement (collectively, the "Common Transactional
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Expenses"), including, without limitation (i) all fees and expenses of counsel,
accountants, investment bankers, experts and consultants (specifically excluding
the fees and expenses of accountants retained by HealthFirst and Medford Clinic
in converting the method of accounting from cash basis to accrual basis and the
fees and expenses of local counsel and other experts and consultants retained by
any Company to advise such Company on matters that are of specific interest or
benefit to such Company) in connection with or related to (A) the authorization,
preparation, negotiation, execution and performance of the Reorganization and
Merger Agreement and all agreements, documents and instruments relating thereto,
(B) the formation of PPI and other entities contemplated by the Reorganization
and Merger Agreement, (C) the preparation, filing, printing and mailing of this
Joint Proxy Statement/Prospectus and the Registration Statement, (D) the
solicitation of shareholder approvals, (E) the compensation and benefits paid by
(x) Medford Clinic to Dr. Bonazzola and Medford Clinic's former chief financial
officer (currently PPI's controller) since September 1, 1996, (y) Corvallis
Clinic to Mr. Dupell from January 1, 1996 through July 28, 1996, and (z)
HealthFirst to Mr. Goldberg since July 1, 1996 and a PPI executive assistant
since July 15, 1996, in each case only to the extent the services of such
persons since such dates or during such period have been directed on matters
that are of common interest and benefit to the Companies and (f) all other
matters related to the consummation of the transactions contemplated by the
Reorganization and Merger Agreement that are of common interest and benefit to
the Companies and (ii) all reasonable operating expenses of PPI, including
salaries of employees, and, in the event the Proposals are abandoned by the
parties, all severance payments to be made to executive officers of PPI.
Under the Expense Sharing Agreement, each Company is required to make cash
disbursements to PPI in an amount equal to its pro rata share of the Common
Transactional Expenses, calculated on the basis of FTE of such Company on June
1, 1996, which pro rata shares (the "Pro Rata Shares") are 42.6% for
HealthFirst, 33.8% for Corvallis Clinic and 23.6% for Medford Clinic.
The September 19, 1996 amendment and restatement of the Expense Sharing
Agreement provided that (i) the Companies shall make cash disbursements
(referred to herein as "Disbursements") to PPI from time to time on any business
day during the period from July 29, 1996 to and including the Effective Time, or
an earlier date if the Transactions are abandoned or terminated prior to the
Effective Time, in accordance with the terms of the Reorganization and Merger
Agreement, its Pro Rata Share of the Common Transactional Expenses, (ii) all
Disbursements relating to the Common Transactional Expenses shall be made only
to PPI and no such Disbursements shall be made directly to third parties on
behalf of PPI to which PPI is indebted contractually or otherwise obligated
("Third-Party Disbursements"); PROVIDED, HOWEVER, that (A) Corvallis Clinic may,
on behalf of PPI, continue to make compensation payments directly to Mr. Dupell
pursuant to the Amended and Restated Employment Agreement, dated as of September
19, 1996, between Mr. Dupell and PPI and (B) HealthFirst may, on behalf of PPI,
continue to make compensation payments directly to Mr. Goldberg pursuant to the
Amended and Restated Employment Agreement, dated as of September 19, 1996,
between Mr. Goldberg and PPI, and to a PPI executive assistant, (C) Medford
Clinic may, on behalf of PPI, continue to make compensation payments directly to
Medford Clinic's former chief financial officer (currently PPI's controller),
(D) all Third-Party Disbursements relating to the Common Transactional Expenses
made by any Company from January 1, 1996 through September 19, 1996 shall be
recognized and counted as part of such Company's Pro Rata Share and (E) any
Company that has made disbursements in excess of its Pro Rata Share shall be
reimbursed by the other Companies in an aggregate amount equal to such excess.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
STOCK AND OPTION HOLDINGS OF DIRECTORS AND OFFICERS.
The Reorganization and Merger Agreement contemplates that, prior to the
Merger, each of the Companies will adopt a stock option plan for certain of its
employees and grant New Options to purchase shares of its capital stock. From
and after the Effective Time, each New Option to purchase or receive HealthFirst
Series 1 Shares, Corvallis Clinic Class B Stock or Medford Clinic Common Stock,
as the case
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may be, will be converted into a PPI Option to purchase or receive the same
number of shares of PPI Class A Common Stock as the holder of such New Option
would have received had such holder exercised his or her New Option in full
immediately prior to the Effective Time, with the exercise price per share to be
adjusted as described below.
- The adjusted exercise price per share for each New Option currently
covering shares of HealthFirst Series 1 Shares will be determined by
dividing the exercise price in effect for such New Option immediately
prior to the Effective Time by 308.
- The adjusted exercise price per share for each New Option currently
covering shares of Corvallis Clinic Class B Stock will be determined by
dividing the exercise price in effect for such New Option immediately
prior to the Effective Time by 163.
- The adjusted exercise price per share for each New Option currently
covering shares of Medford Clinic Common Stock will be determined by
dividing the exercise price in effect for such New Option immediately
prior to the Effective Time by 27,474.
As of November 1, 1996, none of the Companies have issued stock options. It
is anticipated that the Companies will issue, in accordance with the
Reorganization and Merger Agreement, (i) New Options to purchase an aggregate of
1,704.5 HealthFirst Series 1 Shares, (ii) New Options to purchase an aggregate
of 2,385 shares of Corvallis Clinic Class B Stock, and (iii) New Options to
purchase an aggregate of 10.6 shares of Medford Clinic Common Stock.
In the aggregate, as of November 1, 1996 (a) HealthFirst's directors and
executive officers beneficially owned approximately 10% of the outstanding
HealthFirst Class A Shares, (b) Corvallis Clinic's directors and executive
officers beneficially owned (i) approximately 10% of the outstanding Corvallis
Clinic Class A Stock, (ii) approximately seven percent of the outstanding
Corvallis Clinic Class B Stock and (iii) approximately 10% of the outstanding
Corvallis Clinic Class C Stock, and (c) Medford Clinic's directors and executive
officers beneficially owned approximately 12% of the outstanding Medford Clinic
Common Stock.
Upon the Effective Time, it is anticipated that (a) the current directors
and executive officers of HealthFirst will beneficially own approximately four
percent of the outstanding shares of PPI Class A Common Stock, (b) the current
directors and executive officers of Corvallis Clinic will beneficially own
approximately two percent of the outstanding shares of PPI Class A Common Stock
and (c) the current directors and executive officers of Medford Clinic will
beneficially own approximately three percent of the outstanding shares of PPI
Class A Common Stock.
All of the current directors and executive officers of each Company have
indicated that it is their present intention to vote their shares in the
respective Company FOR approval of the Merger Proposal. For more information,
see "Operation, Management and Business of PPI After the Merger--Principal
Stockholders of PPI." See "The HealthFirst Shareholder Meeting--Vote Required";
"The Corvallis Clinic Shareholder Meeting--Vote Required" and "The Medford
Clinic Shareholder Meeting--Vote Required".
EMPLOYMENT AND SEVERANCE ARRANGEMENTS.
In anticipation of the consummation of the Merger, certain of the executive
officers and directors of HealthFirst, Corvallis Clinic and Medford Clinic have
been named as executive officers and directors of PPI. See "Operation,
Management and Business of PPI After the Merger--Management of PPI."
In anticipation of the consummation of the Merger, each of Mr. Goldberg, Mr.
Dupell, Dr. Bonazzola, Mr. Erstgaard, Mr. Kobriger and Mr. Ness has executed an
employment agreement with PPI (each, a "PPI Employment Agreement"). The PPI
Employment Agreement of Mr. Goldberg became effective as of July 1, 1996; the
PPI Employment Agreement of Mr. Dupell became effective as of July 29, 1996; the
PPI Employment Agreements of Dr. Bonazzola, Mr. Erstgaard, Mr. Kobriger and Mr.
Ness
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become effective at the Effective Time. The PPI Employment Agreements provide
for the following compensation and benefits:
1. Mr. Goldberg is employed as President and Chief Executive Officer of PPI
for a term of three years. From July 1, 1996 until the Effective Time, Mr.
Goldberg is paid a base salary at an annual rate of $300,000. From and after the
Effective Time, Mr. Goldberg will (a) be paid a base salary at an annual rate of
$225,000, (b) be eligible for an annual incentive bonus not less than $125,000
assuming achievement of the financial standards of performance and 100% of the
agreed non-financial objectives and (c) receive an option to purchase 50,000
shares of PPI Class A Common Stock at the fair market value of such shares as of
the date such option is granted, which option shall vest and become exercisable
with respect to 20% of such shares subject to such option on each anniversary of
the date of the grant.
Pursuant to his PPI Employment Agreement, Mr. Goldberg, on October 30, 1996,
received a restricted stock award of 27,000 shares of PPI Class A Common Stock,
one-third of which restricted shares shall vest as of each of the first, second
and third anniversaries of the Effective Time, provided that Mr. Goldberg is
still employed on each such anniversary. In connection with the grant of
restricted stock to Mr. Goldberg, PPI and Mr. Goldberg entered into a restricted
stock agreement, which agreement sets forth certain terms and conditions,
including, without limitation, restrictions on transfer of shares, requirements
of vesting and forfeiture, redemption of shares and extension of a loan by PPI
to Mr. Goldberg in an amount equal to the tax liability resulting from the grant
of such restricted stock not to exceed $25,000. Such loan shall accrue interest
at the adjusted federal rate, as determined by the IRS, and shall be repaid in
120 equal and consecutive monthly installments, which installments shall be
deducted from his payroll; provided, however, that the loan shall be immediately
due and payable on the date Mr. Goldberg's employment with PPI is terminated.
In the event Mr. Goldberg's employment is terminated by PPI without cause,
he shall receive his base salary and medical, health and accident and disability
insurance for a term of 12 months after the date of such termination. In the
event the Merger fails to occur on or before January 31, 1997, Mr. Goldberg
would be entitled to (i) be "made whole" by PPI for losses (if any) in
purchasing a home in Portland, Oregon (including closing and loan costs),
provided Mr. Goldberg sells that home and relocates to a new home outside of
Portland, Oregon within one year, and (ii) severance compensation in the amount
of $300,000 and health and disability insurance coverage for 12 months. The
obligations of PPI under the PPI Employment Agreement of Mr. Goldberg are
guaranteed by the Companies.
2. Mr. Dupell is employed as Senior Vice President and Chief Financial
Officer of PPI for a term of three years. Since July 29, 1996, Mr. Dupell has
been paid a base salary at an annual rate of $150,000. From and after the
Effective Time, Mr. Dupell will (a) be eligible for an annual incentive bonus of
not less than $90,000 assuming achievement of the financial standards of
performance and 100% of the agreed non-financial objectives and (b) receive an
option to purchase 35,000 shares of PPI Class A Common Stock at the fair market
value of such shares as of the date such option is granted, which option shall
vest and become exercisable with respect to 20% of such shares subject to such
option on each anniversary of the date of such grant.
Pursuant to his PPI Employment Agreement, Mr. Dupell received, on October
30, 1996, a restricted stock award for 27,000 shares of PPI Class A Common
Stock, one-third of which restricted shares shall vest as of each of the first,
second and third anniversaries of the Effective Time, provided that Mr. Dupell
is still employed on each such anniversary. In connection with the grant of
restricted stock to Mr. Dupell, PPI and Mr. Dupell entered into a restricted
stock agreement, which agreement sets forth certain terms and conditions,
including, without limitation, restrictions on transfer of shares, requirements
of vesting and forfeiture, redemption of shares and the extension of a loan by
PPI to Mr. Dupell in an amount equal to the tax liability resulting from the
grant of such restricted stock not to exceed $25,000. Such loan shall accrue
interest at the adjusted federal rate, as determined by the IRS, and shall be
repaid in 120 equal consecutive monthly installments, which installments shall
be deducted from his pay; provided, however,
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that the loan shall be immediately due and payable on the date Mr. Dupell's
employment with PPI is terminated.
In the event Mr. Dupell's employment is terminated by PPI without cause, he
shall receive his base salary and medical, health and accident and disability
insurance for a term of 12 months after the date of such termination. In the
event the Merger fails to occur on or before January 31, 1997, Mr. Dupell would
be entitled to (i) be "made whole" by PPI for losses (if any) in purchasing a
home in Portland, Oregon (including closing and loan costs), provided Mr. Dupell
sells that home and relocates to a new home outside of Portland, Oregon, within
one year, (ii) severance compensation in the amount of $150,000 and (iii) health
and disability insurance coverage for 12 months. The obligations of PPI under
the PPI Employment Agreement of Mr. Dupell are guaranteed by the Companies. Mr.
Dupell is not entitled to receive any severance or termination payments
resulting from his termination of employment with Corvallis Clinic either in
anticipation of the consummation of the Merger, or upon consummation of the
Merger.
3. Dr. Bonazzola is employed as Senior Vice President and Chief Medical
Officer of PPI for a term of three years. Commencing at the Effective Time, Dr.
Bonazzola will (a) be paid a base salary at an annual rate of $190,000, (b)
receive a bonus award of $25,000, (c) be eligible for an annual incentive bonus
of not less than $70,000 assuming achievement of the financial standards of
performance and 100% of the agreed non-financial objectives and (d) receive an
option to purchase 35,000 shares of PPI Class A Common Stock at the fair market
value of such shares as of the date such option is granted, which option shall
vest and become exercisable with respect to 20% of the shares subject to such
option on each anniversary of the date of such grant.
In the event Dr. Bonazzola's employment is terminated by PPI without cause,
he shall receive his base salary and medical, health and accident and disability
insurance for a term of 12 months after the date of such termination. In the
event the Merger fails to occur on or before January 31, 1997, Dr. Bonazzola
would be entitled to (i) be "made whole" by PPI for losses (if any) in
purchasing a home in Portland, Oregon (including closing and loan costs),
provided Dr. Bonazzola sells that home and relocates to a new home outside of
Portland, Oregon, within one year, (ii) severance compensation in the amount of
$190,000 and (iii) health and disability insurance coverage for 12 months. The
obligations of PPI under the PPI Employment Agreement of Dr. Bonazzola are
guaranteed by the Companies. Dr. Bonazzola is not entitled to receive any
severance or termination payments resulting from his termination of employment
with Medford Clinic either in anticipation of the consummation of the Merger, or
upon consummation of the Merger.
4. Each of Messrs. Ness and Kobriger is employed as a Senior Vice President
of PPI for a term of three years. Commencing at the Effective Time, each of
Messrs. Ness and Kobriger will (a) be paid a base salary at an annual rate of
$175,000, (b) be eligible for an annual incentive bonus of not less than $50,000
assuming achievement of the financial standards of performance and 100% of the
agreed non-financial objectives, and (c) receive an option to purchase 35,000
shares of PPI Class A Common Stock at the fair market value of such shares as of
the date such option is granted, which option shall vest and become exercisable
with respect to 20% of such shares subject to such option on each anniversary of
the date of such grant.
Pursuant to their respective PPI Employment Agreements, each of Messrs. Ness
and Kobriger received on October 30, 1996 a restricted stock award for 27,000
shares of PPI Class A Common Stock, one-third of which restricted shares shall
vest as of each of the first, second and third anniversaries of the Effective
Time, provided that such executive officer is still employed on each such
anniversary. In connection with the grant of restricted stock to each of Messrs.
Ness and Kobriger, PPI and each of Messrs. Ness and Kobriger entered into a
restricted stock agreement, which agreement sets forth certain terms and
conditions, including, without limitation, restrictions on transfer of shares,
requirements of vesting and forfeiture, redemption of shares and extension of a
loan by PPI to each of Messrs. Ness and
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Kobriger in an amount equal to the tax liability resulting from the grant of
such restricted stock, not to exceed $25,000. Such loan shall accrue interest at
the adjusted federal rate, as determined by the IRS, and shall be repaid in 120
equal consecutive monthly installments, which installments shall be deducted
from his pay; provided, however, that the loan shall be immediately due and
payable on the date each of Messrs. Ness' and Kobriger's employment with PPI is
terminated.
In the event Mr. Ness or Mr. Kobriger is terminated by PPI without cause,
such executive shall be entitled to receive his base salary and medical, health
and accident and disability insurance for a term of 12 months after the date of
termination. Neither Mr. Ness nor Mr. Kobriger is entitled to any severance
compensation in the event the Merger fails to occur. Mr. Ness is not entitled to
receive any severance or termination payments resulting from his termination of
employment with Medford Clinic either in anticipation of the consummation of the
Merger, or upon consummation of the Merger. Likewise, Mr. Kobriger is also not
entitled to receive any severance or termination payments resulting from his
termination of employment with Corvallis Clinic either in anticipation of the
consummation of the Merger, or upon consummation of the Merger.
5. Mr. Erstgaard is employed as Senior Vice President of PPI for a term of
three years. Commencing at the Effective Time, Mr. Erstgaard will (a) be paid a
base salary at an annual rate of $175,000, (b) be eligible for an annual
incentive bonus of not less than $50,000 assuming achievement of the financial
standards of performance and 100% of the agreed non-financial objectives, (c)
receive an option to purchase 35,000 shares of PPI Class A Common Stock at the
fair market value of such shares as of the date such option is granted, which
option shall vest and become exercisable with respect to 20% of such shares
subject to such option on each anniversary of the date of such grant.
In the event Mr. Erstgaard is terminated by PPI without cause, he shall be
entitled to receive his base salary and medical, health and accident and
disability insurance for a term of 12 months after the date of termination. Mr.
Erstgaard is not entitled to any severance compensation in the event the Merger
fails to occur. Mr. Erstgaard is not entitled to receive any severance or
termination payments resulting from his termination of employment with
HealthFirst either in anticipation of the consummation of the Merger, or upon
consummation of the Merger.
SHAREHOLDER APPROVALS
HEALTHFIRST SHAREHOLDER APPROVAL
The affirmative vote of the holders of a majority of the outstanding
HealthFirst Class A Shares is required for the approval of the PC Reorganization
Proposal and the Merger Proposal.
CORVALLIS CLINIC SHAREHOLDER APPROVAL
The affirmative vote of the holders of two-thirds of the outstanding shares
of Corvallis Clinic Class A Stock and two-thirds of the outstanding shares of
Corvallis Clinic Class B Stock, in each case as a separate voting group, is
required for the approval of the PC Reorganization Proposal the Merger Proposal.
MEDFORD CLINIC SHAREHOLDER APPROVAL
The affirmative vote of the holders of a majority of the outstanding shares
of Medford Clinic Common Stock is required for approval of the PC Reorganization
Proposal and the Merger Proposal.
RIGHTS OF SECURITY HOLDERS
The shareholders of each of HealthFirst, Corvallis Clinic and Medford Clinic
should be aware that upon receipt of PPI Class A Common Stock, their rights as
shareholders, which are governed by the laws of the State of Oregon and the
articles of incorporation and bylaws of each such Company (the "Governance
Documents"), will be governed by the laws of the State of Delaware, the state of
incorporation of PPI, and
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will be governed by the PPI Certificate and the PPI Bylaws. At the Effective
Time, the rights of the shareholders of each of HealthFirst, Corvallis Clinic
and Medford Clinic will be different, and possibly adversely affected, due to
differences between the Governance Documents and the PPI Certificate and the PPI
Bylaws. Accordingly, the shareholders of each of the Companies should carefully
review the following, which the Companies believe addresses all material
differences in the rights of the shareholders upon the Effective Time, to
understand how certain of their rights as shareholders will be affected upon
consummation of the Merger.
The following is a brief description of those differences. This description
does not purport to be a complete explanation of all of the differences between
the rights of the stockholders of PPI and the shareholders of each of
HealthFirst, Corvallis Clinic and Medford Clinic. Furthermore, the
identification of specific differences is not meant to indicate that other
differences do not exist. The following summary is also qualified in its
entirety by reference to the DGCL, the Governance Documents, the PPI Certificate
and the PPI Bylaws.
SHAREHOLDER VOTING REQUIREMENTS
Under the Governance Documents, unless otherwise required by Oregon law, (i)
an action requiring HealthFirst shareholder approval must be approved by a
majority vote of HealthFirst Class A Shares, each as a voting group, present in
person or represented by proxy and entitled to vote on the subject matter at a
meeting at which a quorum is present, (ii) an action requiring Corvallis Clinic
shareholder approval must be approved in general by a two-thirds vote of
Corvallis Clinic Class A Stock, and in certain cases, the vote of two-thirds of
the Corvallis Clinic Class B Stock; except that the right to elect certain
committee members is relegated to the holders of Corvallis Clinic Class B Stock,
and in any case shareholders may be present in person or represented by proxy
and entitled to vote on the subject matter at a meeting at which a quorum is
present and (iii) an action requiring Medford Clinic shareholder approval must
be approved by a majority vote of Medford Clinic Common Stock present in person
or represented by proxy and entitled to vote on the subject matter at a meeting
at which a quorum is present. The Governance Documents of each Company permits
shareholders to take action by written consent without a meeting of
shareholders.
Under the PPI Certificate, unless specified therein to the contrary, an
action requiring PPI stockholder approval must be approved by a majority vote of
shares of Class A Common Stock present in person or by proxy and entitled to
vote on the subject matter at a meeting at which a quorum is present. The PPI
Certificate contains provisions which require the affirmative vote of 80% of the
outstanding shares of all classes and series of PPI Common Stock to approve
certain business transactions involving any "interested stockholder" (the owner
of 15% or more of the then outstanding shares of PPI Common Stock). These
provisions are designed to discourage potential acquisition proposals, delay or
prevent a change in control of PPI and thus limit the price that certain
investors might be willing to pay in the future for shares of PPI Class A Common
Stock. These provisions include a staggered board of directors and authority of
the PPI Board to authorize the issuance, without further shareholder approval,
of preferred stock with rights and privileges senior to PPI Common Stock. PPI
also is subject to Section 203 of the DGCL, which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested stockholder" for a period of
three years following the date that such stockholder became an interested
stockholder.
In addition, the PPI Certificate specifically prohibits any action being
taken by written consent without a meeting of stockholders.
NOTICE PROCEDURES FOR SHAREHOLDER PROPOSALS
Under the Governance Documents of each of the Companies, (i) any special
meeting of HealthFirst shareholders may be called for any purpose upon written
demand of the holders of not less than one-tenth
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of all of the outstanding shares entitled to vote at such meeting and the notice
of any such meeting is required to be delivered not less than 10 days nor more
than 60 days before the date of the meeting, (ii) any special meeting of
Corvallis Clinic shareholders may be called for any purpose upon written demand
of the holders of not less than one-tenth of all of the outstanding shares
entitled to vote at such meeting and the notice of any such meeting is required
to be delivered not less than 10 days before the date of the meeting and (iii)
any special meeting of Medford Clinic shareholders may be called for any purpose
upon written demand of the holders of not less than one-third of all of the
outstanding shares entitled to vote at such meeting and the notice of any such
meeting is required to be delivered not less than 10 days nor more than 50 days
before the date of the meeting.
The PPI Certificate and the PPI Bylaws establish advance notice procedures
with regard to the nomination, other than by or at the direction of the Board of
Directors, of persons for election as directors. The PPI procedures require
nominations for the election of directors at an annual meeting to be in writing
and received by the Secretary of PPI, not less than 30 days nor more than 60
days prior to the meeting. If less than 40 days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder must be received by the Secretary not later than the close of
business on the tenth day following the mailing of notice of the date the
meeting was made public. The notice of nomination must set forth certain
information with respect to the stockholder and each nominee for director.
Although these procedures do not give the PPI Board any power to approve or
disapprove stockholder nominations for election of directors, they may have the
effect of precluding a nomination for election of directors, if the proper
procedures are not followed, and could discourage or deter a third party from
conducting a solicitation of proxies to elect its own slate of directors, even
if such solicitation might be beneficial to PPI or its stockholders.
Accordingly, these provisions may have certain anti-takeover effects to which
the shareholders of each of HealthFirst, Corvallis Clinic and Medford Clinic are
not currently subject.
REDUCTIONS OR EXPANSION OF BOARD
The Governance Documents of each of the Companies provide that (i) the
number of directors on the HealthFirst Board may be increased or decreased by
the affirmative vote of the holders of a majority of the outstanding shares,
(ii) the number of directors on the Corvallis Clinic Board may be increased or
decreased by the affirmative vote of the holders of two-thirds of the
outstanding shares of Corvallis Clinic Class A Stock and (iii) the number of
directors on the Medford Clinic Board may be increased or decreased by the
affirmative vote of the holders of 60% of the outstanding shares.
The PPI Bylaws provide that (i) to decrease the number of directors on the
PPI Board requires the approval of a majority of the PPI Board and at least one
director from each class of directors and (ii) to increase the number of
directors on the PPI Board requires the approval of two-thirds of the entire PPI
Board and at least one director from each class of directors. Amendment of the
Bylaws to eliminate the two-thirds approval provision requires the approval of
two-thirds of the directors. Accordingly, after the closing of the Merger, it
may be more difficult for the PPI Board to increase or decrease the number of
members on the PPI Board than a comparable change was for the HealthFirst Board,
the Corvallis Clinic Board or the Medford Clinic Board. Consequently, the PPI
Certificate provisions may have certain anti-takeover effects.
REMOVAL OF DIRECTORS
The Governance Documents of each of the Companies provide that (i) a member
of the HealthFirst Board may be removed, with or without cause, by the
affirmative vote of the holders of not less than two-thirds of the outstanding
shares entitled to vote at an election of directors, (ii) a member of the
Corvallis Clinic Board may be removed, with or without cause, by the affirmative
vote of the holders of a majority of the outstanding shares entitled to vote at
an election of directors and (iii) a member of the Medford Clinic
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Board may be removed, with or without cause, by the affirmative vote of the
holders of a majority of the outstanding shares entitled to vote at an election
of directors.
The DGCL provides that, except with respect to corporations with classified
or staggered boards of directors or cumulative voting, a director may be
removed, with or without cause, by the holders of the majority of the shares
entitled to vote at an election of directors. The PPI Certificate and the PPI
Bylaws allow for the removal of directors only for cause, by the affirmative
vote of the holders of two-thirds of the voting stock entitled to elect
directors. Accordingly, after the consummation of the Merger, the ability of PPI
stockholders to remove a director of PPI will be more restrictive than currently
is the case for HealthFirst, Corvallis Clinic and Medford Clinic.
AMENDMENT TO THE PPI CERTIFICATE AND PPI BYLAWS
Under the Governance Documents of each of the Companies, (i) the Governance
Documents of HealthFirst may be amended by the affirmative vote of the holders
of a majority of the outstanding shares, (ii) the Governance Documents of
Corvallis Clinic may be amended by the affirmative vote of the holders of
two-thirds of the outstanding shares of Corvallis Clinic Class A Stock, except
that the affirmative vote of the holders of two-thirds of the outstanding shares
of Corvallis Clinic Class B Stock is required to approve certain specified
matters affecting the rights of such holders and (iii) the Governance Documents
of Medford Clinic may be amended by the affirmative vote of the holders of 60%
of the outstanding shares.
The PPI Certificate provides that certain provisions of the PPI Certificate
and PPI Bylaws may not be amended by the vote of the stockholders, unless
approval is received from at least 80% of the combined voting power of all PPI
stock entitled to vote in the election of directors. Such provisions include
those governing:
(i) the number, election and terms of directors,
(ii) stockholder nomination of director candidates and the introduction of
business at annual meetings,
(iii) filling newly created directorships and vacancies,
(iv) the removal of directors,
(v) calling special meetings,
(vi) the stockholders' inability to act by written consent,
(vii) the rights of the directors and officers of PPI with respect to
indemnification under Article 7 of the PPI Bylaws, and
(viii) the approval of new bylaws or the amendment or repeal of, or approval
of any provision inconsistent with, the provisions of the PPI Bylaws
described in clause (i) through (vii).
Accordingly, it may be more difficult for the stockholders of PPI to amend
certain sections of the PPI Certificate than currently is the case for
shareholders of HealthFirst, Corvallis Clinic and Medford Clinic with respect to
their Governance Documents. This could work to the benefit or detriment of
shareholders depending upon a shareholder's position with respect to a
particular issue.
SPECIAL MEETINGS
Under the Governance Documents of each of the Companies, (i) any special
meeting of HealthFirst shareholders may be called for any purpose by the
president of HealthFirst, the HealthFirst Board or upon written demand of the
holders of not less than one-tenth of all of the outstanding shares entitled to
vote at such meeting, (ii) any special meeting of Corvallis Clinic shareholders
may be called for any purpose by the president of Corvallis Clinic, the
Corvallis Clinic Board or upon written demand of the holders of not less
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than one-tenth of all of the outstanding shares entitled to vote at such meeting
and (iii) any special meeting of Medford Clinic shareholders may be called for
any purpose by the president of Medford Clinic, the Medford Clinic Board or upon
written demand of the holders of not less than one-third of all of the
outstanding shares entitled to vote at such meeting and the notice of any such
meeting.
Special meetings of the stockholders of a Delaware corporation may be called
by the board of directors or by the persons authorized in the corporation's
certificate of incorporation or bylaws. The PPI Bylaws provide that special
meetings of the stockholders may be called by the PPI Board or President. The
PPI Bylaws provide that special meetings of the stockholders of the corporation
may be called by the Chairman of the Board, President, or the PPI Board or its
Executive Committee, or on written request of the holders of at least 20% of the
shares outstanding and entitled to vote.
Accordingly, each of the shareholders of HealthFirst and Corvallis Clinic
will be subject to a more restrictive standard as stockholders of PPI with
respect to the calling of special meetings of stockholders after the Merger.
GOVERNMENT AND REGULATORY APPROVALS
It is a condition to the consummation of the transactions contemplated by
the Reorganization and Merger Agreement that each of the Companies must have
received necessary government and regulatory approvals prior to the Merger. At
any time before or after the Effective Time, the Federal Trade Commission or the
Antitrust Division of the United States Department of Justice or any state could
take action pursuant to the federal or state antitrust laws to seek to enjoin
the consummation of the Merger. Private parties may also seek to take legal
action under the antitrust laws. Based on information available to them,
HealthFirst, Corvallis Clinic and Medford Clinic believe that the Merger can be
effected in compliance with federal and state antitrust laws. PPI, HealthFirst,
Corvallis Clinic and Medford Clinic are aware of no governmental or regulatory
approvals required for the consummation of the Merger, other than compliance
with federal and applicable state securities and corporate laws, and the
required transfer of or amendment to certain of HealthFirst's, Corvallis
Clinic's and Medford Clinic's licenses and permits.
FEDERAL INCOME TAX CONSIDERATIONS
PC DISTRIBUTIONS
If, for federal income tax purposes, each of the New PC Distributions
satisfies the requirements for tax-free treatment under Sections 355 and
368(a)(1)(D) of the Code, then the following tax treatment will result:
(i) no gain or loss will be recognized by (and no amount will be included in
the income of) a holder of Old PC Shares upon the receipt of shares of
capital stock in a New PC ("New PC Shares");
(ii) no gain or loss will be recognized by (and no amount will be included
in the income of) any Company or such Company's New PC upon the
distribution of the New PC Shares;
(iii) the aggregate tax basis of the New PC Shares and the Old PC Shares in
the hands of each shareholder of such Company after the New PC
Distribution will, in each instance, be the same as the basis of the
Old PC Shares held by such shareholder immediately before the New PC
Distribution, allocated in proportion to the fair market value of each;
and
(iv) assuming that the Old PC Shares are held as capital assets, the holding
period of the New PC Shares received in the New PC Distribution by a
holder of Old PC Shares will include the period during which such Old
PC Shares were held.
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If any New PC Distribution does not qualify under Section 355 of the Code,
then:
(i) a corporate level tax would be payable based upon the amount by which
the fair market value of the New PC Shares distributed to the
shareholders of such Company exceeded such Company's adjusted tax basis
therein; and
(ii) each holder of Old PC Shares who receives New PC Shares in the New PC
Distribution will hold such shares at a fair market value basis and
will be treated as having received a taxable distribution, taxed first
as a dividend to the extent of such shareholder's pro rata share of
such Company's current and accumulated earnings and profits on the date
of the applicable New PC Distribution, and then as a nontaxable return
of capital to the extent of such shareholder's basis in the Old PC
Shares (with any remaining amount being taxed as capital gain). In such
event, the transaction may also be taxable for state and local tax
purposes.
It is the belief of the respective boards of directors of the Companies
that, based on the terms and conditions of the New PC Management Agreement
between PPI and each New PC and the limited nature of such New PC's business,
such New PC would have no more than a nominal value and that the New PC
Distribution would not involve any material tax exposure to the shareholders of
each of the Companies.
Treasury regulations governing Section 355 of the Code require that each
shareholder of a Company who receives New PC Shares pursuant to the New PC
Distribution attach a statement to his or her federal income tax return for the
taxable year in which he or she received such stock, which statement shows the
applicability of Section 355 of the Code to the New PC Distribution. Each of the
Companies will provide each shareholder thereof with the information necessary
to comply with this requirement, if applicable.
MERGER
Counsel to PPI and each of the Companies, will also, upon the basis of
certain assumed and described facts, render an opinion that, for federal income
tax purposes, it is more likely than not that the Merger will constitute a
tax-free transaction. As a tax-free transaction, the Merger will result in the
following general federal income tax consequences: (i) no gain or loss will be
recognized by the shareholders of each of the Companies who exchange their Old
PC Shares for PPI Class A Common Stock pursuant to the Merger, (ii) the
aggregate tax basis of PPI Class A Common Stock received in the Merger will
equal the aggregate tax basis of the Old PC Shares exchanged therefor, (iii) no
gain or loss will be recognized by each of the Companies in connection with the
Merger and (iv) provided that the Old PC Shares are held as a capital asset at
the Effective Time, the holding period of PPI Class A Common Stock will include
the holding period of such Old PC Shares.
THE FOREGOING SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE PC
DISTRIBUTIONS AND THE MERGER AND RELATED TRANSACTIONS IS FOR GENERAL INFORMATION
ONLY. SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS AS TO THE
PARTICULAR CONSEQUENCES TO THEM OF THE APPLICABLE PC DISTRIBUTION AND THE
MERGER, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS. THIS
SUMMARY MAY BE INAPPLICABLE TO SHAREHOLDERS WHO RECEIVED THEIR SHARES OF CAPITAL
STOCK OF THEIR RESPECTIVE COMPANIES PURSUANT TO THE EXERCISE OF OPTIONS OR AS
OTHER FORMS OF COMPENSATION (INCLUDING HOLDERS OF RESTRICTED STOCK) OR WHO ARE
NOT CITIZENS OR RESIDENTS OF THE UNITED STATES, WHO SHOULD CONSULT THEIR OWN TAX
ADVISERS AS TO THE CONSEQUENCES OF THE APPLICABLE PC DISTRIBUTION AND THE
MERGER.
ACCOUNTING TREATMENT
SAB 48 indicates that when a company acquires assets from promoters and
shareholders in exchange for stock just prior to, or at the time, of, its first
public offering, such assets should generally be recorded at the cost to each
such promoter or shareholder. Each of the Companies is involved as a promoter of
the Merger and the related first-time public registration of capital stock of
PPI. Accordingly, the assets and liabilities to be transferred from the
Companies to PPI in connection with the Merger Transactions will be
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recorded on the PPI balance sheet in the same amounts as reflected on the
balance sheets of the Companies at the Effective Time.
As reflected in the "Unaudited Pro Forma Financial Statements of PPI", all
assets and liabilities reflected in the historic balance sheets of the Companies
are expected to be transferred to PPI in the Merger. In addition, it is expected
that certain of the intangible assets, contractual commitments and contingent
liabilities of the Companies, which are not set forth on the respective historic
balance sheets of the Companies, would also be transferred to PPI.
DISSENTERS' RIGHTS REGARDING THE MERGER
Holders of record of HealthFirst Class A Shares, Corvallis Clinic Class A
Stock, Corvallis Clinic Class B Stock or Medford Clinic Common Stock who comply
with the applicable procedures summarized herein (collectively, the "Dissenting
Shareholders") will be entitled to receive fair value of the shares held by such
Dissenting Shareholders under Sections 60.551 through 60.594 of the Oregon
Business Corporation Act. A Dissenting Shareholder must follow the steps
summarized below properly and in a timely manner to properly assert such
Dissenting Shareholder's rights.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO DISSENTERS' RIGHTS UNDER THE OREGON BUSINESS CORPORATION ACT AND IS QUALIFIED
IN ITS ENTIRETY BY THE FULL TEXT OF SECTIONS 60.551 THROUGH 60.594 WHICH IS
REFERRED IN ITS ENTIRETY AS APPENDIX G TO THIS PROXY STATEMENT. ALL REFERENCES
IN SECTIONS 60.551 THROUGH 60.594 AND IN THIS SUMMARY TO A "SHAREHOLDER" ARE TO
A RECORD HOLDER OF HEALTHFIRST CLASS A SHARES, CORVALLIS CLINIC CLASS A STOCK,
CORVALLIS CLINIC CLASS B STOCK OR MEDFORD CLINIC COMMON STOCK AS TO WHICH
DISSENTERS' RIGHTS ARE ASSERTED. VOTING AGAINST, ABSTAINING FROM VOTING OR
FAILING TO VOTE ON APPROVAL AND ADOPTION OF THE PC REORGANIZATION PROPOSAL OR
THE MERGER PROPOSAL WILL NOT CONSTITUTE A DEMAND FOR FAIR VALUE WITHIN THE
MEANING OF SECTION 60.551 OF THE OREGON BUSINESS CORPORATION ACT.
Under the Oregon Business Corporation Act, Dissenting Shareholders who
follow the procedures set forth in Sections 60.551 through 60.594 will be
entitled to receive the fair value of the shares held thereby, plus accrued
interest. The term "fair value" is defined in Section 60.551(4) to mean the
value of the shares immediately before the consummation of the proposed merger
to which the Dissenting Shareholder objects, excluding "any appreciation or
depreciation in anticipation" of the proposed merger unless exclusion would be
inequitable.
Under Section 60.561, where a proposed merger is to be submitted for
approval at a meeting of shareholders, the notice of meeting must state that
shareholders are or may be entitled to assert dissenters' rights under Sections
60.551 through 60.594 and must include in such notice a copy of Sections 60.551
through 60.554. This Joint Proxy Statement/Prospectus constitutes such notice to
the holders of HealthFirst Series 1 Shares, HealthFirst Series 2 Shares,
Corvallis Clinic Class A Stock, Corvallis Clinic Class B Stock or Medford Clinic
Common Stock. The applicable statutory provisions of the Oregon Business
Corporation Act are attached to this Joint Proxy Statement/Prospectus as
Appendix G. Failure to timely and properly comply with the procedures specified
in the Oregon Business Corporation Act will result in the loss of dissenters'
rights.
A Dissenting Shareholder wishing to exercise such holder's dissenters'
rights (i) must not vote in favor of adoption of the Merger Proposal, and (ii)
must deliver, prior to the vote on the Merger Proposal, a written notice of such
Dissenting Shareholder's intent to demand payment for the shares held thereby.
The HealthFirst Special Meeting and vote will be held on December 18, 1996. The
Corvallis Clinic Special Meeting and vote will be held on December 19, 1996. The
Medford Clinic Special Meeting and vote will be held on December 16, 1996.
Notices should be delivered to HealthFirst at 10535 NE Glisan, Portland,
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Oregon 97220, Attention: Secretary; to Corvallis Clinic at 444 NW Elks Drive,
Corvallis, Oregon 97330, Attention: Secretary or to Medford Clinic at 555 Black
Oak Drive, Medford, Oregon 97504, Attention: Secretary. A Dissenting Shareholder
wishing to exercise dissenters' rights must be the record holder of such shares
before the date of the first announcement of the terms of the proposed merger to
news media or shareholders (the "Required Date") and must continue to hold such
shares of record until the Effective Time. Accordingly, a Dissenting Shareholder
who is the record holder of the shares on such date but who thereafter transfers
such shares prior to the Effective Time will lose any right to receive fair
value of such shares.
HealthFirst, Corvallis Clinic and Medford Clinic shall, within 10 days after
the Effective Time, notify each Dissenting Shareholder who has complied with the
statutory requirements summarized above that the Merger has become effective.
Such notice from the Company shall set a date by which such Company must receive
the payment demand, which date may not be less than 30 days nor more than 60
days after such Company delivers such notice. Each Dissenting Shareholder who
has received the notice from HealthFirst, Corvallis Clinic or Medford Clinic
must make a written demand for payment of fair value held thereby within the
period specified in the Company's notice, certify whether such Dissenting
Shareholder acquired the shares before the Required Date and deposit such
Dissenting Shareholder's stock certificates with the Company in which such
Dissenting Shareholder is a shareholder. The written demands for payment of fair
value, the certification of the Dissenting Shareholder regarding the Required
Date and the stock certificates representing such shares shall be delivered to
(i) in the case of HealthFirst shareholders, to HealthFirst at 10535 NE Glisan,
Portland, Oregon 97220, Attention: Secretary, (ii) in the case of Corvallis
Clinic shareholders, to Corvallis Clinic at 444 NW Elks Drive, Corvallis, Oregon
97330, Attention: Secretary and (iii) in the case of Medford Clinic
shareholders, to Medford Clinic at 555 Black Oak Drive, Medford, Oregon 97504,
Attention: Secretary. A Dissenting Shareholder who demands payment and deposits
the stock certificates with the Company retains all of the rights of a
shareholder. After receiving such demand, certification and stock certificates
(the "Payment Demand Date"), such Company must pay the amount such Company
estimates to be the fair value of such shares plus accrued interest. The payment
must be accompanied by such Company's latest financial statements and a
statement of estimate of the fair value and accrued interest.
If the Company fails to pay the Dissenting Shareholder within 60 days after
the Payment Demand Date or if the Dissenting Shareholder disagrees with
Company's estimate of fair value, the Dissenting Shareholder may demand from the
Company payment of fair value of his or her shares based on his or her estimate
of fair value. If the Company disagrees with the Dissenting Shareholder's
estimate of fair value, such Company must commence a judicial proceeding within
60 days of the Payment Demand Date to determine the fair value of the shares and
accrued interest. If the Company does not commence a judicial proceeding within
the 60-day period, it must pay the Dissenting Shareholder's estimate of fair
value and accrued interest.
If a petition for an appraisal is timely filed by the Company, after a
hearing on such petition, the court will determine the shareholders who are
entitled to dissenters' rights and will appraise the "fair value" of their
shares, exclusive of any element of value arising from the Merger, together with
a fair rate of interest, if any, to be paid upon the amount determined to be the
fair value. Dissenting Shareholders considering seeking appraisal should be
aware that the fair value of their shares as determined under Sections 60.551
through 60.594 could be more than, the same as or less than the consideration
they would receive pursuant to the Reorganization and Merger Agreement. The
court shall assess the costs of appraisal against the Company, except that the
court may assess all or a portion of the expenses incurred by the parties to the
proceeding in connection with an appraisal, including, without limitation,
reasonable attorneys' fees and the fees and expenses of experts utilized in the
appraisal proceeding, against a party that acted arbitrarily, vexatiously or not
in good faith.
If any shareholder who properly demands payment of fair value of such
shareholder's shares fails to perfect, or effectively withdraws or loses by
failing to demand payment or deposit the stock certificates with
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the Company, such shareholder's right to receive fair value as provided in the
Oregon Business Corporation Act, the shares held by the shareholder will be
converted into the right to receive the consideration receivable with respect to
such shares under the Reorganization and Merger Agreement.
Dissenting shareholders are urged to consult legal counsel with respect to
dissenters' rights under the Oregon Business Corporation Act. HealthFirst,
Corvallis Clinic and Medford Clinic shareholders considering the exercise of
dissenters' rights should consider the information set forth under "The Merger
and Related Transactions--Federal Income Tax Aspects of the PC Distribution and
the Merger."
BREAK-UP FEE
If the Reorganization and Merger Agreement is terminated as a result of any
material breach of a material obligation of any party or if the board of
directors of any Company shall have determined, in the exercise of its fiduciary
duties under applicable law, not to recommend the Reorganization and Merger
Agreement, the applicable PC Reorganization or the Merger or shall have
withdrawn such recommendation or resolved to do any of the foregoing, then, in
such event, such party shall forthwith pay, within five days of the date of the
termination of the Reorganization and Merger Agreement, to each of the other
Companies a breakup fee in an amount equal to all costs and expenses incurred by
each such party, including, without limitation, all fees and expenses of
counsel, accountants, investment bankers, experts and consultants incurred by
each such Company or on its behalf in connection with or related to the
authorization, preparation, negotiation, execution and performance of the
Reorganization and Merger Agreement, the preparation, filing, printing and
mailing of this Joint Proxy Statement/Prospectus and the Registration Statement,
the solicitation of shareholder approvals and all other matters related to the
consummation of the transactions contemplated thereby (including, without
limitation, the PC Reorganization Transactions and the Merger).
EFFECTS OF THE MERGER
As of the Effective Time, the following will occur.
1. HealthFirst, Corvallis Clinic and Medford Clinic will be merged with
and into PPI, and after the Merger, the separate existence of each of
HealthFirst, Corvallis Clinic and Medford Clinic will cease.
2. Each outstanding HealthFirst Class A Share (except for those held by
shareholders who exercise their dissenters' rights under the Oregon Business
Corporation Act) will be converted into the right to receive 308 shares of
PPI Class A Common Stock.
3. Each outstanding share of Corvallis Clinic Class A Stock (except for
those held by shareholders who exercise their dissenters' rights under the
Oregon Business Corporation Act) will be converted into the right to receive
1,454 shares of PPI Class A Common Stock.(1)
4. Each outstanding share of Corvallis Clinic Class B Stock (except for
those held by shareholders who exercise their dissenters' rights under the
Oregon Business Corporation Act) will be converted into the right to receive
163 shares of PPI Class A Common Stock.(2)
5. Each outstanding share of Corvallis Clinic Class C Stock (except for
those held by shareholders who exercise their dissenters' rights under the
Oregon Business Corporation Act) will be converted into the right to receive
6 shares of PPI Class A Common Stock.(1)
6. Each outstanding share of Medford Clinic Common Stock (except for
those held by shareholders who exercise their dissenters' rights under the
Oregon Business Corporation Act) will be converted into the right to receive
27,474 shares of PPI Class A Common Stock.
7. Each New Option will be assumed by PPI and converted into the right
to purchase or receive, on the same terms and conditions as were applicable
under the New Options, the number of
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shares of PPI Class A Common Stock equal to the number of shares subject to
the New Option, multiplied by the applicable exchange ratio for the
underlying shares of HealthFirst Class A Shares, Corvallis Clinic Class B
Stock or Medford Clinic Common Stock, at an exercise price per share of PPI
Class A Common Stock equal to the former exercise price per share under the
New Option divided by the applicable exchange ratio.
The exchange ratios set forth above were determined on the basis of FTE of
each Company as of October 1, 1996, with full- or part-time equivalence
determined based on a work-week of at least four full-working days for full-time
equivalence. A specified number of shares of PPI Class A Common Stock, equal to
the product of 27,000 multiplied by the number of FTE of each Company ("Merger
Shares"), was allocated to each of the Companies. The exchange ratio for each
share of capital stock of each of the Companies was then computed by dividing
the total outstanding number of shares of capital stock of such Company into the
number of Merger Shares.
The boards of directors of the Companies also determined that the FTE of
each Company represented a fair and reasonable basis for allocation of shares of
PPI Class A Common Stock to be issued by PPI as consideration in the Merger.
Each such board of directors believed that the relative economic value of each
of the Companies derives from the capacity of such Company to generate revenues
for the combined entity, PPI. Each board of directors determined that such
capacity was best measured by reference to the number of FTE providers employed
by a Company. The provision of the Reorganization and Merger Agreement
permitting a distribution to shareholders by a Company if such Company's net
equity per FTE exceeded that of either of the other Companies by a specified
threshold amount was also considered significant.
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(1) The number of shares of PPI Class A Common Stock into which each share of
Corvallis Clinic Class A Stock and each share of Corvallis Clinic Class B
Stock will be converted pursuant to the Merger represents that number having
aggregate value of $23,000 and $100, respectively, the value of each share
of PPI Class A Common Stock being based on the valuation prepared by
American Appraisal Associates, Inc. (an independent valuation firm selected
by Corvallis Clinic pursuant to the Reorganization and Merger Agreement) of
the Companies as a combined entity, assuming such combination as of June 30,
1996.
(2) The number of shares of PPI Class A Common Stock into which each share of
Corvallis Clinic Class B Stock will be converted pursuant to the Merger is
equal to the quotient obtained by dividing (a) 12,035 (the number of all
issued and outstanding shares of Corvallis Clinic Class B Stock at the
Effective Time) into (b) 1,960,248 (the excess of 2,099,250 (the aggregate
number of shares of PPI Class A Common Stock which Corvallis Clinic
shareholders will be entitled to receive as consideration in the Merger)
over 139,002 (the aggregate number of PPI Class A Common Stock into which
all of the issued and outstanding shares of Corvallis Clinic Class A Stock
and Corvallis Clinic Class C Stock will be converted under footnote 1
above)).
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The valuation report prepared by American Appraisal is available for
inspection and copying at the principal executive offices of PPI during its
regular business hours by any holder of equity in the Companies or a
representative of such holder who is designated in writing.
EFFECT ON NEW STOCK OPTION PLANS
The Reorganization and Merger Agreement contemplates that each of the
Companies will, prior to the Effective Time, adopt a stock option plan for
certain of its employees and grant New Options to such employees. None of the
Companies had stock options outstanding before stock option plans were adopted
in contemplation of the Merger. In connection with the Merger and at the
Effective Time, PPI will assume the outstanding obligations of HealthFirst,
Corvallis Clinic and Medford Clinic under New Options to purchase HealthFirst
Series 1 Stock, Corvallis Clinic Class B Stock and Medford Clinic Common Stock.
No further options will be granted by the Companies under any stock option plans
assumed by PPI, except in connection with any repricing of New Options which the
Compensation Committee of the PPI Board may from time to time determine in its
sole discretion to implement. The stock plans to be adopted by the Companies
prior to the Effective Time and anticipated to be so assumed by PPI may be
summarized as follows:
HEALTHFIRST PLAN
1996 Provider Stock Option Plan. As of November 1, 1996, no stock options
were issued and outstanding. It is anticipated that HealthFirst will grant,
prior to the Effective Time, options to its providers under the HealthFirst 1996
Provider Stock Option Plan (the "HealthFirst Plan") to purchase an aggregate of
up to 1,704.5 HealthFirst Series 1 Shares. The HealthFirst Plan will be
administered by a committee appointed by the HealthFirst Board (the "HealthFirst
Committee"). Options granted to providers of HealthFirst cannot be exercised
prior to the Effective Time; in the event the Merger is not consummated, any
option or portion thereof which has not expired on or before the date the
HealthFirst Committee determines the Merger will not be consummated shall expire
automatically. The exercise price of such option will be based on the fair
market value of PPI Class A Common Stock as of the Effective Time.
At the Effective Time, each outstanding option to purchase HealthFirst
Series 1 Shares under the HealthFirst Plan will be converted into the right to
acquire on the same terms and conditions shares of PPI Class A Common Stock
equal to the number of shares subject to each option immediately prior to the
Effective Time multiplied by 308, with the exercise price per share being
adjusted by dividing the exercise price in effect for each option immediately
prior to the Effective Time by 308. See "The Merger and Related
Transactions--Effects of the Merger."
CORVALLIS CLINIC PLAN
1996 Provider Stock Option Plan. As of November 1, 1996, no stock options
were issued and outstanding. It is anticipated that Corvallis Clinic will grant,
prior to the Effective Time, options to its providers under the Corvallis Clinic
1996 Provider Stock Option Plan (the "Corvallis Clinic Plan") to purchase an
aggregate of up to 2,385 shares of Corvallis Clinic Class B Stock. The Corvallis
Clinic Plan will be administered by a committee appointed by the Corvallis
Clinic Board (the "Corvallis Clinic Committee"). Options granted to providers of
Corvallis Clinic cannot be exercised prior to the Effective Time; in the event
the Merger is not consummated, any option or portion thereof which has not
expired on or before the date the Corvallis Clinic Committee determines the
Merger will not be consummated shall expire automatically. The exercise price of
such options will be based on the fair market value PPI Class A Common Stock as
of the Effective Time.
At the Effective Time, each outstanding option to purchase Corvallis Clinic
Class B Stock under the Corvallis Clinic Plan will be converted into the right
to acquire on the same terms and conditions shares of PPI Class A Common Stock
equal to the number of shares subject to each option immediately prior to the
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Effective Time multiplied by 163, with the exercise price per share being
adjusted by dividing the exercise price in effect for each option immediately
prior to the Effective Time by 163. See "The Merger and Related
Transactions--Effects of the Merger."
MEDFORD CLINIC PLAN
1996 EMPLOYEE STOCK OPTION PLAN. As of November 1, 1996, no stock options
were issued and outstanding. It is anticipated that Medford Clinic will grant
options to its employees under the Medford Clinic 1996 Employee Stock Option
Plan (the "Medford Clinic Plan") to purchase an aggregate of up to 10.6 shares
of Medford Clinic Common Stock. The Medford Clinic Plan will be administered by
a committee appointed by the Medford Clinic Board (the "Medford Clinic
Committee"). Options granted to employees of Medford Clinic cannot be exercised
prior to the Effective Time; in the event the Merger is not consummated, any
option or portion thereof which has not expired or been exercised on or before
the date the Medford Clinic Committee determines the Merger will not be
consummated shall expire automatically. The exercise price of such options will
be based on the fair market value of PPI Class A Common Stock as of the
Effective Time.
At the Effective Time, each outstanding option to purchase Medford Clinic
Common Stock under the Medford Clinic Plan will be converted into the right to
acquire on the same terms and conditions shares of PPI Class A Common Stock
equal to the number of shares subject to each option immediately prior to the
Effective Time multiplied by 27,474, with the exercise price per share being
adjusted by dividing the exercise price in effect for each option immediately
prior to the Effective Time by 27,474. See "Terms of the Reorganization and
Merger--Effects of the Merger."
EFFECT ON EXISTING EMPLOYEE BENEFIT PLANS
After 1996, it is anticipated that the Companies will discontinue their
current employee benefit programs and that PPI will adopt new and uniform
benefit programs that cover PPI and each New PCs employees.
EXCHANGE/ISSUANCE OF STOCK CERTIFICATES IN THE MERGER
No later than the Effective Time, PPI will make available, and each holder
of Old PC Shares will be entitled to receive, upon surrender to PPI of one or
more certificates evidencing Old PC Shares for cancellation, certificates
evidencing the number of shares of PPI Class A Common Stock into which such Old
PC Shares are converted in the Merger. Shares of PPI Class A Common Stock into
which Old PC Shares are to be converted in the Merger shall be deemed to have
been issued at the Effective Time.
As soon as reasonably practicable after the Effective Time, PPI shall mail
to each holder of record of converted Old PC Shares (i) a letter of transmittal
(which shall specify that risk of loss of and title to certificates evidencing
Old PC shares shall pass only upon receipt of PPI certificates in such form as
PPI may reasonably specify) and (ii) instructions for exchange of certificates
of each Company for certificates evidencing PPI Class A Common Stock. Upon
surrender of a certificate evidencing Old PC Shares for cancellation to PPI
together with such letter of transmittal, duly executed, the holder of a
certificate of Company shares shall be entitled to receive in exchange therefor
a certificate evidencing such number equivalent shares of PPI Class A Common
Stock.
In the event that any certificate evidencing Old PC Shares has been lost,
stolen or destroyed, the person or entity claiming such loss may give an
affidavit to PPI describing the loss. PPI will issue or cause to be issued in
exchange for such lost, stolen or destroyed certificate, a certificate
evidencing an equivalent number of shares of PPI Class A Common Stock.
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PAYMENT IN LIEU OF FRACTIONAL SHARES
No certificates or scrip evidencing fractional shares of PPI Class A Common
Stock shall be issued upon the surrender for exchange of certificates evidencing
Old PC Shares. In lieu of any such fractional securities, each holder of Old PC
Shares which would otherwise have been entitled to a fraction of a share of PPI
Class A Common Stock upon surrender of certificates evidencing such Old PC
Shares for exchange shall be paid an amount in cash (without interest), rounded
to the nearest cent, equal to the product of (a) such fraction multiplied by (b)
the fair market value of a share of PPI Class A Common Stock as of the Effective
Time as determined by the PPI Board.
PPI'S RIGHT TO REPURCHASE PPI CLASS A COMMON STOCK
The PPI Certificate provides that PPI shall have the right, but not the
obligation, to repurchase all or any portion of a PPI stockholder's shares of
PPI Class A Common Stock (a) upon the undertaking of activities by such
stockholder which are competitive with PPI or physician groups with which PPI
has entered into practice management agreements (a "Noncompetition Breaching
Event") or (b) in the event that such stockholder ceases to be an "Eligible
Investor" (as such term is defined in the PPI Certificate) (referred to herein
as a "Loss of Status Event"). An Eligible Investor is defined in the PPI
Certificate to mean any of the following persons:
(i) an employee or member of the board of directors of (A) PPI, (B) any
entity that, directly or indirectly, controls or is controlled by or are
under common control with PPI or (C) HealthFirst New PC, Corvallis
Clinic New PC, Medford Clinic New PC or any other professional
corporation with which PPI has entered a Management Agreement (each a
"PPI Affiliate");
(ii) a stockholder who, pursuant to such stockholder's employment contract
with PPI or any PPI Affiliate, retires from PPI (A) after more than 20
years of employment by PPI or such PPI Affiliate, with full credit
given for the period of employment by such PPI Affiliate, or (B) at age
62 or older;
(iii) a stockholder whose employment contract with PPI or any PPI Affiliate
is terminated as a result of death or disability; or
(iv) a person or entity that has acquired shares of PPI Class A Common Stock
from PPI in connection with any acquisition by PPI of any stock or
assets of an entity other than a PPI Affiliate.
If PPI elects to repurchase any share of PPI Class A Common Stock from a
stockholder upon the occurrence of a Loss of Status Event, PPI shall pay a
purchase price for each such share in an amount equal to the average closing
sale price of the PPI Class A Common Stock during the preceding four-month
period if the PPI Class A Common Stock was publicly traded or the amount equal
to the fair market value of the PPI Class A Common Stock as of December 31 of
the immediately preceding year, as determined by a nationally-recognized
independent valuation firm (the "Valuation Firm").
If PPI elects to repurchase any share of PPI Class A Common Stock from a
stockholder upon the occurrence of a Noncompetition Breaching Event, PPI shall
pay a purchase price for each such share in an amount equal to the lesser of (i)
the fair market value of such share of PPI Class A Common Stock at the time of
issuance thereof to such stockholder, as determined by the Valuation Firm and
(ii) (A) the average closing sales price of PPI Class A Common Stock or any
other common stock of PPI during the preceding four-month period if such PPI
Class A Common Stock was publicly traded during such period, or (B) otherwise,
the fair market value of such share of PPI Class A Common Stock at the time of
such repurchase, as determined by the Valuation Firm.
RESALES OF PPI CLASS A COMMON STOCK AND REGISTRATION RIGHTS
Subject to the registration right of PPI Class A Common Stockholders
described below, no stockholder of PPI may sell, assign, transfer, pledge or
otherwise encumber or dispose of any shares of PPI
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Class A Common Stock owned by such stockholder or any interest in any such
shares prior to the fifth anniversary of the date of the Effective Time. Any
attempted or purported sale, assignment, transfer, pledge or other encumbrance
or disposition of shares of PPI Class A Common Stock by such stockholder shall
be null and void and of no force and effect.
Stockholders of PPI who receive PPI Class A Common Stock in the Merger
("Class A PPI Stockholders") shall have the right to elect, at any time after
the second anniversary of the Effective Time, to require PPI to include up to
20% of the shares of PPI Class A Common Stock held by such Class A PPI
Stockholder in a registration statement (a "Subsequent Registration Statement")
relating to any proposed registered public offering of PPI Class A Common Stock
that occurs subsequent to the Effective Time and under which PPI expects to
receive proceeds in excess of $30 million, net of underwriters' commissions and
discounts (a "Registered Public Offering"). If, at any time after the second
anniversary of the Effective Time, PPI shall determine to register any of its
securities (any such registration being referred to herein as a "Registration")
under the Securities Act of 1933, as amended (the "Securities Act"), in
connection with any Registered Public Offering, PPI shall deliver to each Class
A PPI Stockholder a written notice. For a period of 30 days following the date
of any such notice, each Class A PPI Stockholder shall have the right, but not
the obligation, to elect to require PPI to include up to 20% of the shares of
PPI Class A Common Stock received by such Class A PPI Stockholder in connection
with the Merger (the "Registrable Shares") in the Subsequent Registration
Statement related to such Registration.
If the managing underwriter selected by PPI in connection with a
Registration (the "Managing Underwriter") determines, for any reason, that the
number of Registrable Shares to be included in a Registered Public Offering must
be reduced, the Managing Underwriter may reduce the number of such Registrable
Shares. The reduction in shares shall occur as described below. First, the
number of Registrable Shares owned by PPI Class A Common Stockholders who are
not Eligible Investors ("Ineligible Investors") shall be reduced pro rata (for
the definition of "Eligible Investors," see "Terms of the Reorganization and
Merger--PPI's Right to Repurchase PPI Class A Common Stock"). Second, if the
Managing Underwriter determines that the number of Registrable Shares must be
reduced despite the exclusion of all Registrable Shares owned by Ineligible
Investors, the number of Registrable Shares to be included in the Subsequent
Registration Statement that are owned by Eligible Investors shall be reduced pro
rata.
All expenses incurred in connection with any Subsequent Registration
Statement, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for PPI, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration shall be borne by PPI, provided
that, unless otherwise stated, all selling expenses relating to Registrable
Shares shall be borne by each Class A PPI Stockholder, pro rata on the basis of
the number of Registrable Shares included in the Subsequent Registration
Statement.
Each Class A PPI Stockholder will indemnify PPI, each of its directors and
officers, each person who controls PPI or such "underwriter" (within the meaning
of Section 15 of the Securities Act), and each other Class A PPI Stockholder,
each of its officers and directors and partners and each person controlling such
"Holder" (within the meaning of Section 15 of the Securities Act), against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such Subsequent Registration Statement,
prospectus, offering circular or other similar document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading.
PPI shall have the right to terminate or withdraw any Subsequent
Registration Statement initiated by PPI prior to the effectiveness of such
Subsequent Registration Statement, whether or not any Class A PPI Stockholder
has elected to include its shares of PPI Class A Common Stock in such Subsequent
Registration Statement.
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PHYSICIAN PRACTICE MANAGEMENT INDUSTRY
GENERAL
PPMs create vehicles through which physicians can join together in large
entities that are favorably positioned to contract and negotiate with managed
care organizations and other third-party payors. PPMs essentially manage the
business of group practices. The managed providers usually enter into long-term
exclusive contracts with the PPM and pay a percentage of their revenues to the
PPM.
Both medical groups and payors can benefit from the PPM structure. Providers
gain skilled and innovative management, sophisticated information systems and
capital resources, all of which give the providers time to practice medicine and
treat patients. Payors look to PPMs to help maintain quality outcomes,
management programs and patient care data, and to provide broader geographic
coverage for their enrollees.
THE INDUSTRY
The American Medical Association ("AMA") lists approximately 650,000
physicians in its data base of practicing physicians. According to the AMA's
Census of Medical Groups, as published in the AMA's 1996 edition of "Medical
Groups in the US: A Survey of Practice Characteristics" (the "AMA Report"),
there were 19,787 medical groups and 210,811 medical group physicians in 1995.
Over the past two to three decades, the medical group practice industry has
evolved and strengthened. Physicians have organized into increasingly large and
complex single- and multi-specialty group practices. According to data reported
in the AMA Report, between 1965 and 1995, the number of physicians in the U.S.
in group practices (versus solo practices) has more than quadrupled. Inasmuch as
current market trends indicate that physicians are joining medical groups to
deal effectively with managed care, among other things, there is a substantial
potential customer base for PPMs. However, relatively few PPMs are in a position
to tap into physician practice management on a national scale. The few PPMs that
can compete on a broad geographic basis tend to be publicly traded PPMs.
In addition, a large amount of revenue flows through the medical services
industry. Physician services in 1994 accounted for approximately $190 billion,
according to data collected by HCFA and the Office of National Health
Statistics. According to a projection of national health expenditures published
by the U.S. Department of Health and Human Services, there was an estimated $1
trillion spent on health care in the U.S. in 1995, approximately 14.2% of the
gross domestic product.
Despite the size of the industry, however, the potential financial leverage
of physicians generally has been diluted due to the way physicians have
traditionally organized. Health care in the United States historically has been
delivered through unrelated health care providers, including individual or small
groups of primary care physicians and specialists. In addition, many physicians
have joined together in informal group practices or affiliations--independent
physician associations ("IPAs"), PHOs and clinics-without-walls. While these
organizational structures do, in fact, bring physicians together, they generally
have failed to provide the market strength and benefits of truly integrated and
self-governed medical group practices. IPAs, PHOs and other such arrangements
may well be "way stations" as physicians move from solo and small groups to
larger integrated multi-specialty groups.
The migration of physicians into groups has paralleled other trends in
health care organization, finance and delivery in the U.S. The influence of
managed care and the size of HMOs have increased significantly. Managed care is
widely believed to be the most likely vehicle to deliver and spread the costs of
high quality and cost-efficient health care services. The emergence of and
popularity of managed care has had a dramatic effect on physician organizations.
The combination of the growth of HMOs and recent HMO industry consolidation has
resulted in fewer and larger HMO companies nationwide.
Managed care trends, aligned with other market forces such as consolidation
of the hospital industry, more sophisticated purchasing of health care by
employers and increasingly complex governmental
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regulations, have further contributed to the growth of physician groups and
PPMs. Concerns over the accelerating cost of health care have resulted in the
increasing prominence of managed care. Traditional physician practices generally
may be at a disadvantage in a managed care environment because they typically
have high operating costs, little purchasing power with suppliers and must
spread overhead over a relatively small revenue base. In addition, these
physician practices often have insufficient capital to purchase new technologies
and lack the sophisticated systems necessary to contract effectively with
larger, better-funded competitors. These trends have motivated successful
medical group practices to seek strong corporate strategic and capital partners.
Hence the emergence and growth of the PPM industry.
In the late 1980s PPMs emerged. These corporate entities are intended to
bring management talent, corporate structure, business discipline and acumen and
capital to their managed medical groups. To date, the industry has divided into
two dominant physician equity models of PPMs: (i) companies that manage
multi-specialty groups and (ii) companies which focus on the management of
single-specialty medical groups or networks. PPI is a PPM which will focus on
well-positioned primary care-based multi-specialty group practices.
Opportunities for growth may arise in other market segments, however, such as
acquiring groups of physicians from hospital systems, staff model HMOs or
academic medical groups. In spite of the growth trends referred to above,
organizing physicians and managing medical groups is a daunting task. To date,
PPMs manage less than 10% of the nation's physician practices and it is
uncertain that PPMs will become an attractive organizational model which will
capture any significant share of the physician revenue market. There is no
assurance that PPI as a PPM will be attractive to other physicians or physician
groups.
CAPITATION
HMOs typically pay their providers on a capitated or other prepaid basis.
Capitation revenue will be a significant source of revenue generated by the New
PCs after the Merger. Capitation arrangements between health plans and providers
typically involve a payment to the provider of a specific amount per assigned
member per month, in exchange for such provider's assumption of the obligation
to provide or arrange for all medically necessary covered services required by
each health plan member assigned to such provider. The aggregate capitation
payments made to capitated providers constitute the most significant portion of
the compensation to such providers. (Certain other payments, such as copayments
and risk pool distributions, are also typically made to capitated providers.)
This obligation to provide or arrange for all covered services applies to
providers (and will apply to PPI under the proposed arrangement with the New
PCs), regardless of whether any medical services are rendered to the HMO or
other health plan capitated members and regardless of the cost to the provider
of any covered services provided. If a capitated provider refers to an outside
specialist or outpatient ancillary service provider, the charges of such third-
party providers typically must be paid by the capitated provider. Capitation,
therefore, shifts the risk of the cost of providing covered services from the
payor to the capitated provider. Reinsurance and stop-loss protection are
typically maintained by providers to mitigate capitation risk. Nevertheless, if
revenue received by the provider is insufficient to cover the costs of covered
services provided to or arranged for patients, the provider's operating results
will suffer.
One of the challenging issues for providers, and therefore PPMs, to address
is how to effectively manage capitation risk with respect to relevant patient
populations. The capitation risk ideally should be well understood, managed and
spread over large numbers of insured HMO members. The ability to bear and manage
risk is a major factor in the growth of the number, size and complexity of
medical group practices.
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BENEFITS A PPM CAN PROVIDE A GROUP PRACTICE
The underlying rationale for the existence and growth of the PPM industry is
to add value to medical groups. Value is added in four interrelated ways:
- CAPITAL. PPMs provide needed capital for medical groups. Capital is
required to finance growth, to replace and enhance equipment and to manage
clinical and business data and information.
- MANAGEMENT EXPERTISE. As medical groups grow and enter into managed
care capitation arrangements, the need for management and business expertise
becomes more critical. PPMs can provide management and business discipline
to medical groups.
- COST MANAGEMENT. PPMs assist medical groups in achieving significant
economies of scale by consolidating medical groups. Medical groups can
benefit from the increased collective purchasing power and the increased
leverage with vendors. Significant savings can be expected in employee
benefits, medical and office supply purchasing and insurance costs.
- REVENUE ENHANCEMENT. PPMs have the ability to contract on behalf of
increasingly large numbers of groups and physicians. Representing large
numbers of providers gives the PPM increased leverage to negotiate
beneficial contracts with payors, as well as with hospitals, service vendors
and ancillary service providers.
GOVERNMENT REGULATION
Each of the Companies is subject to federal and state laws regulating the
relationships among providers of health care services, physicians and other
clinicians. These laws include the fraud and abuse provisions of the Medicare
and Medicaid statutes, which prohibit the solicitation, payment, receipt or
offering of any direct or indirect remuneration for the referral of Medicare or
Medicaid patients or for the recommending, leasing, arranging, ordering or
purchasing of Medicare or Medicaid covered services. Other laws impose
significant penalties for false or improper billings for physician services and
impose restrictions on physician referrals for designated health services to
entities with which they have financial relationships. Violations of those laws
may result in substantial civil or criminal penalties for individuals or
entities, including large civil money penalties and exclusion from participation
in the Medicare and Medicaid programs. Significant laws applicable to the health
care industry generally are described in more detail below.
FRAUD AND ABUSE LAWS
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. In recent years, there has
been increasing scrutiny by law enforcement authorities, the United States
Department of Health and Human Services, various state agencies, the federal and
state courts and Congress, of financial arrangements between health care
providers and potential sources of patient referrals to ensure that such
arrangements are not disguised mechanisms to pay for patient referrals. The
Anti-Kickback Statute is broad in scope and interpretations by various courts
have been ambiguous or conflicting in certain respects. To the extent PPI is
deemed to be either a referral source or a separate provider under the New PC
Management Agreements that is in a position to influence referrals to or from
physicians, the financial arrangements under these agreements could be subject
to scrutiny and prosecution under the Anti-Kickback Statute.
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PHYSICIAN SELF-REFERRAL LAW
Significant prohibitions against physician "self-referrals" apply to a
variety of physician-owned or physician-interested entities. The Stark statute
(42 U.S.C. Section1395nn) generally prohibits referrals by physicians for
designated health services reimbursable under the Medicare and Medicaid programs
to entities in which the referring physician or an immediate family member has
an ownership interest or compensation arrangement, unless an exception provided
under the statute applies. The Stark statute is broad and ambiguous in some
respects, and regulations clarifying the provisions have been issued only with
respect to clinical laboratory services (which was the subject of the "Stark I"
legislation). Regulations interpreting the portion of the Stark statute known as
"Stark II" or future clarification of existing regulations could require PPI,
the New PCs and related physicians to modify the form of their relationships.
THE CORPORATE PRACTICE OF MEDICINE
Certain laws prohibit the practice of medicine by corporations other than
professional corporations. It is possible that the operations of PPI could be
challenged on the ground that PPI, a business corporation, will participate in
operations or revenues of the New PCs and other PPI-managed medical practices to
a prohibited extent. Oregon law regarding the corporate practice of medicine
does not specifically approve or forbid practice management companies from
contracting with professional corporations and has been subjected to limited
judicial and regulatory interpretation. In the event of a prohibition against
the PPI form of business, the relationship between PPI and each of the New PCs
may have to be modified, possibly resulting in a reduction of revenues received
by PPI for managing the New PCs.
FEE-SPLITTING LAWS
The laws of many states prohibit physicians from splitting fees with
non-physicians. Although Oregon currently does not have such a prohibition,
there is no assurance that Oregon will not enact new laws or interpret existing
laws in a manner that would require modifications to PPI's business in order to
comply with such a law. In addition, expansion of the operations of PPI to
jurisdictions that have laws that could be deemed to restrict or prohibit PPI's
form of arrangement with managed medical groups may require structural and
organizational modifications to PPI's form of management relationship, which
could have an adverse effect on PPI.
MEDICARE/MEDICAID REIMBURSEMENT
State and federal civil and criminal statutes impose substantial penalties,
including civil and criminal fines and imprisonment, upon health care providers
who fraudulently or wrongfully bill governmental or other third-party payors for
health care services. The federal law prohibiting false billings allows a
private person to bring a civil action in the name of the United States
government for violations of its provisions. While management of each Company
has attempted to comply with billing requirements, there is no assurance that
PPI's or the New PCs' activities will not be challenged or scrutinized by
governmental authorities. Moreover, Medicare and other reimbursement rules
impact the fee structure of medical billing. To the extent PPI's or the New PCs'
billing arrangements may need to be modified to comply with existing or modified
regulations, there could be a material adverse financial effect on PPI.
OREGON INSURANCE LAW
The Oregon Department of Consumer and Business Affairs, Insurance Division
(the "Insurance Division"), regulates the transaction of insurance pursuant to
the Oregon Insurance Code. Pursuant to Insurance Division Bulletin 96-2 (the
"Bulletin") issued in April 1996 by the Oregon Insurance Commissioner, health
care providers that are compensated on a capitated basis by a health insurer or
health care service contractor ("HCSC") are not required to obtain a certificate
of authority to transact insurance if
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the capitation is internal to a policy of insurance that is delivered by an
authorized insurer or HCSC. The Bulletin also states that discounted
fee-for-service arrangements with reasonable limits on discounts (i.e., not
open-ended discounts) also do not require a certificate of authority. PPI
arrangements should fall into these categories and therefore be exempt from
regulation as an insurance company. There is no assurance, however, that the
position of the Insurance Division will not change in the future.
ANTITRUST LAWS
Antitrust laws apply to health care providers just as they do to other
businesses; however, certain exceptions specifically applicable to provider
entities are available under current law. Because the New PCs will remain
separate legal entities after the Merger, they may be deemed competitors subject
to a range of antitrust laws which prohibit anti-competitive conduct, including
price fixing, concerted refusals to deal and division of market.
PROPOSED LEGISLATION
In addition to current federal regulations, the Clinton Administration and
several members of Congress have proposed legislation for comprehensive reforms
affecting the payment for and availability of health care services. Aspects of
certain such health care proposals, such as reductions in Medicare and Medicaid
payments and additional prohibitions on direct or indirect physician ownership
of facilities to which they refer patients, if adopted, could have a significant
impact on the health care industry. There can be no assurance as to the ultimate
content, timing or effect of any health care reform legislation, nor is it
possible at this time to estimate the impact of potential legislation on the
industry.
At the time of preparation of this Joint Proxy Statement/Prospectus, certain
legislation also has been proposed in Oregon that would regulate compensation
for medical services (the "Compensation Proposal") and would amend the Oregon
constitution to enable any willing provider to provide services to members
covered by HMOs and other health plans (the "Any Willing Provider Proposal").
The Compensation Proposal contemplates a new statute that would provide that a
health care provider shall not be directly or indirectly compensated, except by
an individual or family, for the delivery of health care according to any
standard other than one or more of the following: (A) work performed; (B) hourly
wage; (C) prearranged salary/benefits; (D) bonuses based upon work performed;
and (E) reimbursement for expenses. The Compensation Proposal also provides
that, after December 31, 1997, any health care provider who has not complied
with such requirements shall have his or her business and professional license
suspended until compliance is achieved. The Any Willing Provider Proposal would
amend the Constitution of the State of Oregon to provide that no law may be
enacted to restrain any person from seeking or receiving the services of various
types of health care providers working within the providers' scope of practice
as established by law. While such amendment expressly states that it is not
intended to prevent an entity from employing measures that would control costs
of health care, specific restrictions may affect the way health care entities do
business.
MANAGEMENT INFORMATION SYSTEMS
The emergence of managed care has increased the need for specific and
extensive information collection, analysis and management throughout the entire
health care industry. Sophisticated and timely data are required for managers
and providers to quantify the revenues and expenses associated with managed care
contracting and with the measurement and determination of efficient utilization
and quality clinical care. Thus, information management systems are moving from
the traditional billing functions to more complex clinical information
management. Increasingly, effective management of health care service delivery
will require the ability to collect, analyze and manage clinical as well as
financial information an a timely basis. Anticipated future developments which
may be required for successful PPMs include voice recognition systems,
electronic medical records, chart tracking systems and advanced actuarial
modeling capability.
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OPERATION, MANAGEMENT AND BUSINESS OF PPI FOLLOWING THE MERGER
BUSINESS OF PPI
The goal of PPI is to pioneer innovative health care delivery into the 21st
century as a leading primary care-based multi-specialty group PPM. To achieve
such goal, PPI endeavors to deliver health care with sound ethical standards by
involving physicians at every level of PPI, including clinical and business
policies and decisions. PPI will continuously seek innovation to enable the New
PCs and other multi-specialty group practices with which PPI has entered into a
practice management agreement to deliver quality patient care and services
efficiently. PPI also actively seeks opportunities to grow through acquisition
of quality primary care based multi-specialty group practices.
PPI will operate as a PPM organization, focusing on the long-term management
of high quality, well-positioned primary care based multi-specialty group
practices. PPI typically will acquire certain assets of established medical
groups, such as their equipment and accounts receivable, and manage such medical
group under a long-term management agreement. Because PPI does not employ
physicians and does not practice medicine, it will not acquire provider
professional services business assets such as Medicare provider numbers.
While PPI is similar to other multi-specialty group practice PPMs, PPI can
be distinguished and differentiated in several important aspects. PPI is the
first PPM to originate in the Pacific Northwest. At the Effective Time, PPI will
have significant geographical presence and strength in the State of Oregon with
nearly 300 providers practicing in three hub clinics (I.E., the New PCs) with 28
clinical delivery sites. PPI is also unique in that it will be owned by group
practice physicians and governed by a board of directors a majority of whom are
group practice physicians. PPI will employ a full-time Chief Medical Officer
responsible for managing the clinician and clinical issues with each group's
medical director. Because PPI will be the surviving corporation of a merger of
three successful primary care-based multi-specialty groups with collectively
more than 150 years of group practice and group practice management experience,
PPI business and clinical managers have extensive experience with managed care
under a variety of payment methodologies, including several forms of capitation.
PPI also has approved the advisory position of a Medical Ethicist to the PPI
Board in order for the physicians affiliated with PPI to adhere to the
fundamental principles of medical ethics, continue to act as advocates for their
patients and provide quality patient care. The Medical Ethicist will attend
board meetings of PPI and advise the PPI Board regarding ethical implications of
the issues with which the PPI Board must deal in the course of its management of
PPI.
THE PPI STRATEGY
PPI's business strategy involves integrating physician group practices into
networks of health care providers. Initially, PPI's operations will be
concentrated in the Pacific Northwest and will be affiliated with approximately
300 providers. PPI believes that there are numerous opportunities to extend its
network across the United States.
The key elements of PPI's strategy include:
- STRENGTHENING OPERATIONAL EFFICIENCIES. Cost reductions can be made
through economies of scale in purchasing supplies, equipment and services.
Operational efficiencies may also be achieved by expanding PPI's market
coverage and number of HMO enrollees, refining utilization management
programs, increasing specialization, developing additional in-house
specialty and ancillary services, increasing the emphasis on outpatient
care and utilizing sophisticated information systems to make available
detailed clinical data that can ensure both quality and cost containment.
- EXPANDING THE EXISTING MARKETS OF THE NEW PCS. Growth in greater Portland,
Corvallis and Medford, Oregon may occur through the acquisition of or
affiliation with physicians and medical groups
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within those markets. PPI will invest capital in each of its merged hub
primary care-based multi-specialty group practices and will assist these
practices in acquiring existing local medical groups. New groups will have
the opportunity to be incorporated into the governance and leadership
structure of the existing PPI hub clinic.
- EXPANSION INTO NEW HUB MARKETS. Expansion into new areas is anticipated to
occur primarily through the acquisition of physician groups. New PPI hub
clinics are expected to be primary care-based multi-specialty groups with
(i) more than 30 physicians, (ii) potential for a significant market
share, (iii) a strong group practice culture, (iv) experience or interest
in managed care and (v) high quality with a strong reputation in its
community. PPI hopes to acquire two additional hub groups in 1997.
- DEVELOPING AND ACQUIRING SMALL PHYSICIAN PRACTICE GROUPS. In markets
including the Pacific Northwest, many communities are too small to support
the typical PPI primary care-based multi-specialty group practice hub.
There are many primary care-based medical groups with fewer providers that
have significant market presence. Opportunities for growth may arise in
market segments other than the physician-owned, primary care-based
multi-specialty groups, such as IPAs and PHOs. PPI may consider
acquisitions such as purchasing groups of physicians from hospital
systems, HMOs or academic medical centers.
PRACTICE MANAGEMENT AGREEMENT
Under the respective New PC Management Agreements, PPI will provide a
variety of management services, and certain facilities and equipment, to the
managed New PCs. Further, PPI will provide certain leased equipment and space to
the managed practices and will employ and provide each managed New PC with
non-physician personnel (other than personnel required to be employed by the New
PCs in order for services rendered by such ancillary service providers "incident
to" physician services to be appropriately billed to and reimbursed by
Medicare). PPI also will enter into agreements directly with health plans and
will receive revenue directly from payors to the extent permissible, or
otherwise as an agent on behalf of the respective New PCs.
In exchange for the management services provided by PPI to a New PC, PPI
will be entitled to receive (a) reimbursement of all Manager's Expenses incurred
by PPI plus (b) 16% of the Distributable Profit Amount of such New PC.
"Distributable Profit Amount" is defined as (i) gross revenues, booked on an
accrual basis and subtracting specified contractual allowances and bad debt,
received by PPI or such New PC relating to services provided by such New PC,
less (ii) Manager's Expenses. Each New PC will be responsible for provider
compensation and benefits. The term "Manager's Expenses" is defined in the New
PC Management Agreement to mean the actual cost of all operating and
non-operating expenses incurred by PPI in the operation of respective New PC's
medical offices. Any allocation of costs (as opposed to a pass-through of actual
direct costs incurred by PPI in connection with the operation of such New PC's
medical offices, for which PPI shall be reimbursed in full) by PPI to such New
PC shall require approval of the joint management board (composed of PPI and
such New PC's representatives) of the proposed cost allocation for a defined
period of time prior to implementation of the function for which a cost
allocation is proposed. "Manager's Expenses" expressly will not include any
corporate overhead charges of PPI (other than as expressly agreed to in the New
PC Management Agreement), federal or state income taxes of PPI or such New PC,
any expenses which are expressly designated as obligations to be assumed solely
by PPI, and any amortization expense resulting from the amortization of costs in
connection with the execution of the New PC Management Agreement.
PPI's management structure will enable each managed New PC to retain
significant control over the operation and strategic direction of its respective
group practice. Specifically, each managed New PC will retain its own physician
board. The functions of this physician board will include:
(i) determination and management of physician compensation methodologies;
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(ii) employing and reviewing (with the assistance of the PPI Chief Medical
Officer) the performance of the PC's Medical Director and compensation
for and appointment of physician managers (e.g., department chairs);
(iii) dealing with individual physician quality and behavioral issues;
(iv) approving all growth and acquisitions by being the only body which can
approve employment of physicians by such New PC; and
(v) appointing three members to the Joint Management Board and designating
its Medical Director as an ex officio member.
Subject to the rights of each New PC's physician board, the business of each
managed New PC will be governed by its Joint Management Board. The Joint
Management Board is designed to represent equally the clinical and physician
perspective and the management and business perspective. The Joint Management
Board is formed by each managed New PC appointing three members (presumably
physician members of the New PC Board) and PPI appointing three members (one of
whom must be the local PPI group practice administrator). The New PC's medical
director will serve as a seventh ex officio, non-voting member of the Joint
Management Board. The Joint Management Board will provide local expertise and
develop and approve all submissions to PPI regarding New PC growth, annual
budgets, payor relations, local strategic initiatives and capital improvements.
The New PC Management Agreements will contain certain significant
restrictions and liquidated damage assessments against the New PCs relating to
certain activities by its employed providers with respect to (a) solicitation of
employees, (b) disclosure or misappropriation of trade secrets by employees and
(c) competition. The New PC Management Agreements provide that no such
restrictions will apply to activities of providers employed by the New PCs who
are not bound by covenants not to compete as of July 26, 1996, and provide other
specific exceptions as well. Medical professionals who are bound or required
(under the New PC Management Agreement) to be bound by noncompetition covenants
in their employment contracts or shareholder agreements with the New PCs will be
prohibited from competing with the business of such respective New PCs. PPI will
have no direct right of enforcement against, or right to receive liquidated
damages from, any provider for any such activities. To the extent any applicable
covenant not to compete in a provider's employment or shareholder agreement with
the New PC is breached by a provider, liquidated damages will be payable by the
employing New PC to PPI. Likewise, liquidated damages will be payable by a New
PC to PPI if an employed provider violates an applicable nonsolicitation
covenant or covenant not to disclose or misappropriate trade secrets. The amount
of such liquidated damages payable by a New PC to PPI generally will equal 50%
of a breaching professional's gross compensation from the New PC during its most
recent fiscal year (in the case of a breach of a covenant regarding trade
secrets or competition) and one year's salary of an employee solicited away from
a New PC or PPI (in the case of a breach of a nonsolicitation covenant). It is
anticipated that each New PC will require each provider employed by such New PC
after July 26, 1996 to indemnify the New PC in the event the New PC becomes
obligated to make a payment to PPI due to such provider's actions. However, the
New PCs will not be required to seek to enforce any right to indemnity it may
have against a provider.
PROPERTIES AND FACILITIES OF PPI
As of the date of this Joint Proxy Statement/Prospectus, PPI owns no
properties. PPI has entered into a lease for an office suite in Portland,
Oregon. The lease is for a term of seven years and has an initial month rent of
$7,317, which will be adjusted annually by increases in inflation.
LEGAL PROCEEDINGS
There are currently no legal proceedings pending, or to the knowledge of
management of each of the Companies and PPI, threatened against PPI.
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The following table sets forth certain information about the persons who
will serve as directors and officers of PPI:
MANAGEMENT OF PPI
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
- ------------------------------------- --- ----------------------------------------------------- -------------
<S> <C> <C> <C>
David M. Goldberg, M.H.A............. 48 President and Chief Executive Officer, Director July 2, 1996
Tim E. Dupell, C.P.A................. 34 Senior Vice President and Chief Financial Officer,
Director July 2, 1996
Michael F. Bonazzola, M.D............ 46 Senior Vice President and Chief Medical Officer,
Director July 2, 1996
Bruce E. Van Zee, M.D................ 51 Chairman of the Board, Director July 2, 1996
David H. Cutsforth, Jr. M.D.......... 49 Director July 2, 1996
Russell A. Dow, M.D.................. 48 Director July 2, 1996
Douglas M. Mancino, Esq.............. 47 Director July 2, 1996
Jerald W. Erstgaard.................. 48 Senior Vice President July 2, 1996
David L. Kobriger.................... 50 Senior Vice President July 2, 1996
Jon D. Ness.......................... 40 Senior Vice President July 2, 1996
</TABLE>
PPI has a Board of Directors consisting of seven persons elected for
three-year staggered terms and holding office until their respective successors
are elected and qualified. Tim E. Dupell, C.P.A. and Michael F. Bonazzola, M.D.
belong to one class of directors whose term expires at the first annual meeting
of stockholders to be held in 1997; David M. Goldberg, M.H.A. and Douglas M.
Mancino, Esq. belong to another class whose term expires at the second annual
meeting of stockholders, to be held in 1998; and Bruce E. Van Zee, M.D., David
H. Cutsforth, Jr., M.D. and Russell A. Dow, M.D. belong to another class whose
term expires at the third annual meeting of stockholders, to be held in 1999.
Officers of PPI are appointed and serve at the discretion of the PPI Board.
MR. DAVID M. GOLDBERG joined PPI as its Chief Executive Officer in 1996. Mr.
Goldberg earned a B.A. degree in Sociology in 1970 from the University of
Colorado at Boulder and a Masters of Science degree in Health Care
Administration in 1977 from the University of Colorado Medical Center, Denver,
Colorado. From 1993 until joining PPI as its founding CEO, Mr. Goldberg was
employed as President of Simmonds Consulting, Inc., a national group practice
strategic planning and merger and acquisition consulting company which he helped
found. Mr. Goldberg was employed by Medical Management, Inc. as senior
consultant from 1986-1992. In this capacity he managed all group practice
management and strategic planning consulting and was instrumental in developing
standardized management, strategic and financial reporting systems for all of
the managed group practices, for the oldest (and then largest) contract group
practice management company in the U.S. The Companies engaged Mr. Goldberg as a
consultant through Simmonds Consulting, Inc. before he was employed by PPI. From
1983-1986, Mr. Goldberg served in a variety of senior management positions at
Lovelace Medical Center and Lovelace Health Plan, then a 250,000 member group
model HMO; Director of Planning for all of the Lovelace organizations and
Director of Primary Care and Associated Group Practices for Lovelace Medical
Center. Mr. Goldberg was the founding executive director of New Mexico Health
Resources, Inc., a private company which was the predecessor to the New Mexico
State Office of Rural Health. After receiving his graduate education under the
guidance of Dr. Leland Kaiser, Mr. Goldberg was a recipient of a Robert Wood
Johnson Foundation grant to co-found a model rural primary care group practice.
During the past 15 years, Mr. Goldberg has been a frequent speaker and lecturer
for the Medical Group Management Association as well as for other national and
regional professional and trade organizations.
MR. TIM E. DUPELL joined PPI as its Chief Financial Officer in 1996. Prior
to joining PPI, Mr. Dupell served as Chief Financial Officer for Corvallis
Clinic beginning in March, 1994. From 1988 to 1994,
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Mr. Dupell held concurrent positions in Finance, Operations and Risk Sharing
Plans with Blue Cross/Blue Shield of Oregon and with the Blue Cross/Blue Shield
health maintenance organization, HMO Oregon. From 1984-1988, Mr. Dupell was a
senior auditor in the Portland, Oregon office of Ernst & Young, LLP. Mr. Dupell
holds a Bachelor's degree in Business from Pacific University. In addition, Mr.
Dupell is a Certified Public Accountant, Certified Management Accountant, and a
Certified Internal Auditor. He is a member of the Oregon Society of Certified
Public Accountants, The American Institute of Certified Public Accountants, The
Institute of Management Accountants, The Institute of Internal Auditors and the
National Association of Accountants.
MICHAEL F. BONAZZOLA, M.D. joined Physician Partners, Inc. as Senior Vice
President and Chief Medical Officer in 1996. Dr. Bonazzola practiced general
internal medicine at Medford Clinic from 1982 to 1996. Dr. Bonazzola holds a
Bachelor's degree in Natural Sciences from Lewis and Clark College and a Doctor
of Medicine degree from University of Oregon Medical School and served as chief
medical resident at St. Vincent Hospital and Medical Center (Portland, Oregon).
He is Board Certified in Internal Medicine. He was a member of the board of
directors of Medford Clinic from 1983-1991 and served as its President from
1989-1991. Since Dr. Bonazzola became Medford Clinic's Medical Director in 1991,
Medford Clinic has grown from 35 physicians, with no managed care contracts, to
64 physicians with approximately 35% of the overall business provided under
managed care contracts. Between 1992 and 1995, Dr. Bonazzola served on the board
of directors of HMO Oregon. He is a Trustee of the Oregon Medical Professional
Review Organization. In addition to his medical and administrative duties, Dr.
Bonazzola airs five nights weekly a medical report on local ABC affiliated
television stations in Medford, Klamath Falls and Eugene, Oregon and presents a
shorter report five mornings each week.
BRUCE E. VAN ZEE, M.D. joined Physician Partners, Inc. as a founding member
of the Board of Directors in 1996. Dr. Van Zee is President and Chairman of the
Board of Medford Clinic. Dr. Van Zee is a practicing physician of Medford Clinic
committed to physician involvement in the governance and management of
innovative health care organizations. He received his medical degree magna cum
laude at the University of Oregon in 1970. He is Board Certified in Internal
Medicine and Nephrology, having completed his post graduate education at the
University of Rochester. Dr. Van Zee has served in a variety of medical
management roles which include chair of the department of medicine and president
of the medical society in his community. He has received advanced post graduate
training in physician management issues and in biomedical ethics.
DAVID H. CUTSFORTH, JR., M.D. joined Physician Partners, Inc. as a founding
member of the Board of Directors in 1996. He practiced as a Philomath Family
Medicine physician before that entity merged with Corvallis Clinic and currently
practices at Corvallis Clinic. Dr. Cutsforth is President and Chairman of the
Board of Corvallis Clinic. Dr. Cutsforth has been active in local and statewide
health forums. He served as a board director for Western Oregon IPA from
1989-1993. He served as an original committee member in the formulation of the
Oregon Health Plan, a national model for Medicaid reform. Dr. Cutsforth received
his medical degree from the University of Oregon in 1973. He is Board Certified
in Family Medicine, having completed his residency training at the University of
Texas in Houston. Dr. Cutsforth has served in a variety of management roles
including chair of the Department of Family Medicine and Peer Review Committee
of Good Samaritan Hospital, Corvallis. He received a superior service award from
the U.S. Public Health Service in 1977 and was recognized as America's Family
Doctor of the Year in 1994.
RUSSELL A. DOW, M.D. joined Physician Partners, Inc. as a founding member of
the Board of Directors in 1996. Dr. Dow serves as Chairman of the Board of
HealthFirst, in Portland, Oregon. Dr. Dow is a HealthFirst physician practicing
Obstetrics and Gynecology and has been involved in medical leadership and
governance for many years. He received his medical degree from Tufts University
School of Medicine in Boston, Massachusetts in 1974. He is Board Certified in
Obstetrics and Gynecology, having completed his post-graduate training at the
Oregon Health Sciences University. Dr. Dow is active in community, state and
regional health and medical policy issues.
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DOUGLAS M. MANCINO, ESQ. joined Physician Partners, Inc. as a founding
outside member of the Board of Directors in 1996. Mr. Mancino is an attorney and
a partner in McDermott, Will & Emery's Los Angeles office. He has had more than
20 years of experience, representing a broad variety of health care
organizations. Mr. Mancino has been recognized by THE NATIONAL LAW JOURNAL as
one of the country's leading managed care lawyers, and by the LOS ANGELES
BUSINESS JOURNAL as one of Southern California's top 100 health care executives.
Mr. Mancino is the author of a new book, TAXATION OF HOSPITALS AND HEALTH CARE
ORGANIZATIONS (Warren, Gorham & Lamont 1995) and a co-author of NAVIGATING YOUR
WAY THROUGH THE FEDERAL SELF-REFERRAL LAW: A GUIDEBOOK TO STARK II (Atlantic
Information Systems, Inc. 1995). He has also co-authored a 1987 Aspen Systems
book, JOINT VENTURES BETWEEN HOSPITALS AND PHYSICIANS and has written more than
30 articles on a variety of health care and taxation topics. Mr. Mancino
received his law degree, summa cum laude, from The Ohio State University of Law
in 1974. He is an active member and officer of several national legal
organizations and publications and is a Fellow of the American College of Tax
Counsel. Mr. Mancino also has served as a director of Health Systems
International, Inc., including acting on its Compensation Committee.
JON D. NESS is Chief Executive Officer of Medford Clinic. Before employment
by Medford Clinic in 1995, he acted as Vice President of Deaconess-Billings
Clinic Health System. Mr. Ness is a member of MGMA and a member of the certified
medical practice executive program. Mr. Ness received his Master of Arts in
Urban Planning from North Dakota State University in 1984. He acted as a
corporate planner of St. Luke's Hospital, affiliated with Fargo Clinic, a 250
multi-specialty clinic, from 1986 to 1989.
JERALD W. ERSTGAARD obtained a Bachelor of Arts degree from the University
of South Dakota with a concentration in business. In 1973, he received a Masters
degree in Business Administration from the University of Wyoming. Mr. Erstgaard
worked as an assistant administrator at Corvallis Clinic from 1979 to 1986. He
joined Metropolitan as an administrator in 1986. On February 1, 1996, at the
time of the business combination of Metropolitan and Suburban, Mr. Erstgaard
became Chief Executive Officer of HealthFirst. During Mr. Erstgaard's tenure,
HealthFirst has grown from an organization of 15 physicians to an entity with
approximately 120 physicians. In addition to his role in management at
HealthFirst, Mr. Erstgaard acts as a member of the board of directors of the
American Medical Group Association and of the Northwest Group Practices
Association. He is a Member of Medical Group Management Association. He
previously served as President of Oregon Medical Group Management Association.
DAVID L. KOBRIGER has been the Chief Executive Officer of Corvallis Clinic
since 1993. Prior to working at Corvallis Clinic, he acted as Executive Vice
President at Gould Medical Foundation, a multi-specialty group with over 100
physicians based in Modesto, California. He served as Vice President of
Corporate Banking of Bank of America from 1970 to 1984, during which time he was
appointed to Bank of America's Advisory Council. Mr. Kobriger received a
Bachelors degree in Economics from South Dakota State University in 1969 and a
Masters degree in Banking from the Pacific Coast Banking School of the
University of Washington in 1982. In 1984, Mr. Kobriger was selected as
outstanding volunteer of Stanislaus County, California. He currently is a member
of the board of directors of the Corvallis, Oregon Chamber of Commerce and has
been a member of the Healthcare Administration Advisory Council of Oregon State
University since 1984.
COMPENSATION OF DIRECTORS
PPI directors are entitled to receive compensation for serving as directors
in an amount equal to $1,000 per board meeting or $5,000 per fiscal quarter of
PPI, whichever is greater. In addition, directors may be reimbursed for
reasonable and actual out-of-pocket expenses incurred in connection with their
duties as directors.
COMPENSATION OF EXECUTIVE OFFICERS
PPI was incorporated on June 20, 1996, and has not conducted any operations
to date. For details of the compensation of the executive officers of PPI under
their respective employment agreements with PPI, see "Interests of Certain
Persons in the Merger--Terms of the Reorganization and the Merger."
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The following table sets forth information regarding the number of shares of
stock the executive officers and directors of the Companies hold in the
Companies and will hold in PPI after the PC Reorganization Transactions and the
Merger:
PRINCIPAL STOCKHOLDERS OF PPI
<TABLE>
<CAPTION>
PPI CLASS A
HEALTHFIRST STOCK
CLASS A SHARES BENEFICIALLY
BENEFICIALLY PERCENTAGE OWNED (PRO PERCENTAGE
OWNED OUTSTANDING FORMA) OUTSTANDING
--------------- --------------- ------------ ----------------
<S> <C> <C> <C> <C>
HEALTHFIRST
Leigh C. Dolin, M.D......................................... 100 1.1 %** 30,800 *
Resa L. Hyzer, M.D.......................................... 100 1.1 % 30,800 *
Malcolm L. McAninch, M.D.................................... 100 1.1 % 30,800 *
Alar Mirka, M.D............................................. 100 1.1 % 30,800 *
Gloria J. Myers, M.D........................................ 100 1.1 % 30,800 *
James C. Ritzenthaler, M.D.................................. 100 1.1 % 30,800 *
Matthew M. Shelley, M.D..................................... 100 1.1 % 30,800 *
Russell A. Dow, M.D......................................... 100 1.1 % 30,800 *
Vern R. Williams, M.D....................................... 100 1.1 % 30,800 *
--
--- --- ------------
ALL OFFICERS AND DIRECTORS OF HEALTHFIRST
AS A GROUP................................................ 900 9.78 % 277,200 4.2 %
</TABLE>
- ------------------------
*Less than one percent (1%) of the total PPI Class A Common Stock outstanding
on a pro forma basis.
**Rounded to the nearest tenths.
PRINCIPAL STOCKHOLDERS OF PPI
<TABLE>
<CAPTION>
CORVALLIS CLASS A CORVALLIS CLASS CORVALLIS CLASS
SHARES B SHARES C SHARES
BENEFICIALLY PERCENT BENEFICIALLY PERCENT BENEFICIALLY
OWNED OUTSTANDING OWNED OUTSTANDING OWNED
----------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
CORVALLIS CLINIC
Janice L. Frost, M.D........... 1 1.6%** 100 0.8% 150
Jess W. Hickerson, M.D......... 1 1.6% 117 1.0% 190
Christopher P. Swan, M.D....... 1 1.6 % 100 0.8 % 50
David H. Cutsforth, Jr.,
M.D.......................... 1 1.6 % 100 0.8 % 50
John R. Ladd, M.D.............. 1 1.6 % 235 2.0 % 190
Darrel D. Bibler, M.D.......... 1 1.6 % 239 2.0 % 190
- -- --
--- ---
ALL OFFICERS AND DIRECTORS OF
CORVALLIS CLINIC AS A
GROUP........................ 6 9.5 % 891 7.4 % 820
<CAPTION>
PPI CLASS A
STOCK
BENEFICIALLY
PERCENT OWNED (PRO PERCENT
OUTSTANDING FORMA) OUTSTANDING
--------------- ------------ ----------------
<S> <C> <C> <C>
CORVALLIS CLINIC
Janice L. Frost, M.D........... 1.9%** 18,654 *
Jess W. Hickerson, M.D......... 2.4% 21,165 *
Christopher P. Swan, M.D....... 0.6 % 18,054 *
David H. Cutsforth, Jr.,
M.D.......................... 0.6 % 18,054 *
John R. Ladd, M.D.............. 2.4 % 40,899 *
Darrel D. Bibler, M.D.......... 2.4 % 41,551 *
--
--- ------------
ALL OFFICERS AND DIRECTORS OF
CORVALLIS CLINIC AS A
GROUP........................ 10.4 % 158,877 2.4 %
</TABLE>
- --------------------------
*Less than one percent (1%) of the total PPI Class A Common Stock outstanding
on a pro forma basis.
**Rounded to the nearest tenths.
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<PAGE>
<TABLE>
<CAPTION>
PPI CLASS A
MEDFORD COMMON STOCK
SHARES BENEFICIALLY
BENEFICIALLY PERCENT OWNED (PRO PERCENT
OWNED OUTSTANDING FORMA) OUTSTANDING
----------------- --------------- ------------ ----------------
<S> <C> <C> <C> <C>
MEDFORD CLINIC
Bruce E. Van Zee, M.D....................................... 1 1.8%** 27,474 *
Steven Schnugg, M.D......................................... 1 1.8% 27,474 *
Bruce E. Johnson, M.D....................................... 1 1.8 % 27,474 *
Daniel Brandenburg, M.D..................................... 1 1.8 % 27,474 *
John A. Schwartz, M.D....................................... 1 1.8 % 27,474 *
Daniel M. Wayman, M.D....................................... 1 1.8 % 27,474 *
Michael F. Bonazzola, M.D................................... 1 1.8 % 27,474 *
- --
--- ------------
ALL OFFICERS AND DIRECTORS OF MEDFORD CLINIC
AS A GROUP................................................ 7 12.3 % 192,318 3.0 %
</TABLE>
- ------------------------
*Less than one percent (1%) of the total PPI Class A Common Stock outstanding
on a pro forma basis.
**Rounded off to the nearest tenths.
INDEMNIFICATION AGREEMENTS
Pursuant to Article VII of the PPI Bylaws, PPI is obligated to indemnify
each of its directors and officers that could require PPI, among other things,
to indemnify them against certain liabilities that may arise by reason of their
status or service as directors and officers and to advance expenses incurred by
them as a result of any proceeding against them as to which they could be
indemnified.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
PPI expects to adopt the Physician Partners, Inc. Change in Control Plan
(the "Change in Control Plan"). Pursuant to agreements entered into under the
Change in Control Plan, each employee selected to participate (including each of
the named executive officers) will be entitled to separation pay and benefits
following a change of control in PPI and the employee's subsequent termination
of employment unless such termination is voluntary and unprovoked or results
from death, disability, retirement or cause. The eligible termination must occur
within 24 months of the change in control or the agreement is void. Each
agreement will continue for three years from the date the agreement is executed
and automatically renew every three years from that date unless the employee
receives written notice of termination at least ninety days prior to the renewal
date. The separation pay under each agreement (including those for each of the
named executive officers) will equal three years' annualized base salary and
maximum target bonus. In addition, upon an eligible termination, all outstanding
options to purchase PPI Class A Common Stock shall immediately vest and become
exercisable. In the event that any payments to be made to an employee in
connection with a change in control of PPI under the Change in Control Plan or
any other plan or arrangement would not be deductible by PPI for federal income
tax purposes, then the payments under the Change in Control Plan and the
employee's agreement will be reduced as necessary to eliminate the disallowance
of the deduction.
CERTAIN TRANSACTIONS
In connection with the grant of restricted stock to Messrs. Goldberg,
Dupell, Ness and Kobriger under their respective employment agreements with PPI,
it is anticipated that PPI and each such executive officer of PPI will enter
into a restricted stock agreement, which agreement shall set forth certain terms
and conditions, including, without limitation, restrictions on transfer of
shares, requirements of vesting and forfeiture, redemption of shares and
extension of a loan by PPI to such executive officer in an amount
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equal to the tax liability resulting from the grant of such restricted stock.
Such loan shall accrue interest at the adjusted federal rate, as determined by
the IRS, and shall be repaid on the tenth anniversary of the date of the loan;
provided, however, that the loan shall be immediately due and payable on the
date such executive officer's employment with PPI is terminated.
DESCRIPTION OF CAPITAL STOCK OF PPI
The authorized capital stock of PPI consists of (a) 50,000,000 shares of PPI
Common Stock, consisting of 20,000,000 PPI Class A Common Stock and 30,000,000
PPI Class B Common Stock, and (b) 50,000,000 shares of Preferred Stock, par
value $.01 per share ("PPI Preferred Stock"). As of November 1, 1996, there were
111,000 shares of PPI Class A Common Stock outstanding held of record by seven
stockholders, (a) each of HealthFirst, Corvallis Clinic and Medford Clinic
holding 1,000 shares and (b) each of Messrs. Goldberg, Dupell, Ness and Kobriger
holding 27,000 shares.
COMMON STOCK. The holders of PPI Class A Common Stock and PPI Class B
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of stockholders. Subject to the prior rights of
holders of PPI Preferred Stock which may be issued in the future, the holders of
PPI Class A Common Stock and PPI Class B Common Stock are entitled to dividends,
when, as and if declared by the PPI Board, out of funds legally available
therefor. Neither holders of PPI Class A Common Stock nor holders of PPI Class B
Common Stock have preemptive rights.
RESTRICTION ON TRANSFER. No holder of PPI Class A Common Stock may sell,
assign, transfer, pledge or otherwise encumber or dispose of any share of PPI
Class A Common Stock or of any interest therein prior to the fifth anniversary
of the date of the issuance (the "Issuance Date") of such share to such holder.
CONVERSION. Upon the transfer of any whole number or all of the shares of
PPI Class A Common Stock to a third party unaffiliated with the original holder
thereof, the transferred shares of PPI Class A Common Stock will convert into
fully paid and nonassessable shares of Class B Common Stock at the rate of one
share of Class B Common Stock for each share of PPI Class A Common Stock so
converted. The initial number of shares of Class B Common Stock into which
shares of PPI Class A Common Stock are convertible will be subject to adjustment
from time to time, after the date hereof, in case PPI will (i) pay a dividend
in, or make distribution of, shares of Class B Common Stock, (ii) subdivide its
outstanding shares of Class B Common Stock into a greater number of such shares,
(iii) combine its outstanding shares of Class B Common Stock into a smaller
number of such shares or (iv) consolidate or merge with or into another
corporation (other than a consolidation or merger which does not result in any
reclassification or change of PPI Class A Common Stock), or sell or convey all
or substantially all of PPI's assets in their entirety to another corporation.
REGISTRATION RIGHT. A holder of PPI Class A Common Stock has the right to
elect, at any time after the second anniversary of the Issuance Date, to require
PPI to include up to 20 percent of the Registrable Shares in a Subsequent
Registration Statement relating to any proposed registered public offering of
PPI Common Stock under which PPI receives proceeds in excess of $30 million (net
of underwriters' commissions and discounts) ("Registered Public Offering"),
subject to a reduction in the Registrable Shares to be included in the
Subsequent Registration Statement determined by the managing underwriter of such
Registered Public Offering. (See "Terms of Reorganization and Merger--Resales of
PPI Class A Common Stock and Registration Rights."
REPURCHASE RIGHT. PPI has the right, but not the obligation, to repurchase
all or any portion of shares of PPI Class A Common Stock held by a stockholder
in the event such stockholder ceases to be an employee or member of the PPI
Board or of an entity with which PPI has entered into a practice management
agreement, for reasons other than death, disability or retirement, at a certain
price. (See "Terms of Reorganization and Merger--PPI's Right to Repurchase PPI
Class A Common Stock.)
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<PAGE>
PREFERRED STOCK. Subject to the rights of the holders of Series A Junior
Participating Preferred Stock described below, the PPI Board has the authority,
without further stockholder approval, to issue authorized but unissued shares of
preferred stock in one or more series and to determine the preferences, rights,
privileges and restrictions of any series, including the dividend rights,
conversion rights, voting rights, rights and terms of redemption, liquidation
preferences and number of shares constitution, and designation of, such series.
Such issuance of preferred stock may adversely affect, among other things, the
voting rights of existing stockholders. There are no shares of Series A Junior
Participating Stock currently outstanding. PPI has no present plans to issue any
shares of Series A Junior Participating Preferred Stock or any other series or
classes of preferred stock.
ANTITAKEOVER PROVISIONS. PPI Certificate and PPI Bylaws provide for three
classes of directors, with directors in one class serving one-year term, the
second class serving two-year term and the third-class serving three-year term.
Vacancies on the PPI Board may only be filled by the vote of a majority of the
members of the PPI Board. PPI's Certificate and Bylaws also prohibit the
stockholders from taking action by written consent, thus requiring the
stockholders to take all actions at a meeting. Further, the PPI Certificate and
Bylaws require a vote of holders of 80% or more of the outstanding shares before
certain actions may be effected, if two-thirds of the PPI Board have not
previously approved such action. These actions include (i) mergers or
consolidations of PPI, (ii) sales or leases of any substantial part of PPI's
assets, (iii) issuances of securities to another corporation in exchange for
cash, other stock or securities, (iv) the dissolution or liquidation of PPI or
(v) the amendment of certain provisions of PPI Certificate and PPI Bylaws. The
above provisions may have the effect of delaying or making it more difficult for
a stockholder or group of stockholders to take corporate actions or gain control
of PPI. Under the PPI Certificate, the PPI Board has the right to declare a
dividend distribution of a Right for each outstanding share of PPI Common Stock
to stockholders of record. Currently, PPI has no plans to declare such a
dividend distribution. Until a Right is exercised, the holder thereof, as such,
will have no rights as a stockholder of PPI, including, without limitation, the
right to vote or to receive dividends. While the distribution of the Rights will
not be taxable to stockholders or to PPI, stockholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of PPI or for common stock
of the acquiring company as set forth above. The Rights have strong
anti-takeover effects. The Rights will cause substantial dilution to a person or
group that attempts to acquire PPI on terms not approved by PPI's Board. The
Rights should not interfere with any merger or other business combination
approved by the PPI Board since the PPI Board may, at its option, at any time
redeem all, but no less than all, of the then outstanding Rights at the
applicable redemption price.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS. Under
the PPI Certificate, after giving effect to the issuance of shares contemplated
in the Merger and accounting for shares reserved for issuance pursuant to the
Merger and the PPI Option Plans, there will be an aggregate of approximately
10,891,750 authorized but unissued and unreserved shares of PPI Class A Common
Stock, 30,000,000 authorized but unissued and unreserved shares of PPI Class B
Common Stock and 50,000,000 authorized but unissued and unreserved shares of PPI
Preferred Stock. These additional authorized shares may be utilized for a
variety of corporate purposes, including future public offerings to raise
additional capital and to finance corporate acquisitions. Except pursuant to the
Merger and certain derivative securities described in this Joint Proxy
Statement/Prospectus, PPI currently has no plans to issue additional shares of
PPI Common Stock or PPI Preferred Stock. However, one of the effects of
authorized but unissued and unreserved shares of capital stock may be to render
more difficult or discourage an attempt by a potential acquiror to obtain
control of PPI by means of a merger, tender offer, proxy contest or otherwise,
and thereby protect the continuity of PPI's management. The issuance of such
shares of capital stock may have the effect of delaying, deferring or preventing
a change in control of PPI without any further action by the stockholders of
PPI.
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<PAGE>
PPI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in connection with the financial
statements of PPI and the PPI unaudited pro forma financial statements,
contained elsewhere in this Joint Proxy Statement/ Prospectus.
OVERVIEW
PPI has conducted no significant operations to date but will be acquiring,
in connection with the Reorganization and Merger, tangible and intangible assets
and liabilities of, and assuming the rights of the Companies under the Practice
Management Agreements with the New PCs. For a description of the Companies, see
"Business of HealthFirst", "Business of Corvallis Clinic", and "Business of
Medford Clinic". Under the New PC Management Agreements, PPI will provide
certain nonprovider personnel, equipment, space, supplies, and management and
administrative services necessary to operate the medical offices. The Companies
shall be solely and exclusively in control of all aspects of the practice of
medicine and the provision of professional medical services to their patients,
including all medical training and medical supervision of licensed personnel and
PPI shall neither have nor exercise any control or discretion over methods by
which the Companies or the providers shall practice medicine.
Through the Practice Management Agreements, PPI will provide management,
operational, and administrative services to the Companies in return for
management fees. The management fees payable to PPI under the New PC Management
Agreements will be an amount equal to:
(a) reimbursement of all Manager's Expenses, plus
(b) 16% of the Distributable Profit Amount of the managed New PC, where
"Distributable Profit Amount" is defined as
(i) gross revenues, booked on an accrual basis and subtracting specified
contractual allowances and bad debts, received by PPI or such New PC
relating to services provided by such New PC, less
(ii) Manager's Expenses (See "Operation, Management and Business of PPI
Following the Merger--Practice Management Agreement").
Each New PC will be responsible for provider compensation and benefits.
PPI will incur substantial costs and expenses in fulfilling its obligations
to the Companies. The expenses incurred by PPI in fulfilling its obligations
under the New PC Management Agreements are generally the same as the operating
costs and expenses that would have otherwise been incurred by the individual
clinic practices, including the salaries, wages, and benefits of practice
personnel, pharmaceutical and supply expenses involved in administering their
clinical practices, the office (general and administrative) expenses of the
practices, depreciation and amortization of assets acquired from the three
founding clinic practices as well as certain other income items. As further
described in "Business of PPI-- Business Strategy," PPI anticipates being able
to reduce these operating costs and expenses through purchase discounts,
economies of scale, benchmarking programs and more effective equipment
utilization. In addition to the operating costs and expenses discussed above,
PPI will be incurring personnel and administrative expenses in connection with
establishing and maintaining a corporate office, which will provide management,
administrative, marketing and acquisition services.
RESULTS OF OPERATIONS
HISTORICAL. PPI has conducted no significant operations to date and will
not conduct significant operations until the transaction is completed. PPI has
incurred and will continue to incur various legal, accounting, appraisal and
consulting costs in connection with the Reorganization and Merger.
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<PAGE>
PRO FORMA
REVENUES. As discussed in the notes to the unaudited pro forma statement of
operations, the revenues of PPI will consist primarily of fees under the New PC
Management Agreements and reimbursement of direct clinic expenses paid on behalf
of the Companies. The revenues included in the pro forma financial statements of
$67,318,000, $82,793,000, $101,059,000, and $56,753,000 for the years ended
December 31, 1993, 1994, and 1995, and the six months ended June 30, 1996,
respectively, are those that would have been earned if the management agreement
would have been in effect as of January 1, 1993.
PROVIDER COMPENSATION AND BENEFITS. As discussed in the notes to the
unaudited pro forma statement of operations, Provider Compensation and Benefits
will be the responsibility of the New PCs; accordingly, no provider compensation
and benefit costs have been reflected in the PPI pro forma column.
OPERATING EXPENSES. The total pro forma operating expenses of $62,100,000,
$76,028,000, $94,419,000 and $52,948,000 for the years ended December 31, 1993,
1994 and 1995, and for the six months ended June 30, 1996, respectively, do not
reflect any cost reductions anticipated by PPI or the addition of corporate
costs associated with PPI. The trends underlying the individual operating
expenses are discussed in the management's discussion and analysis of financial
results for the historical clinic operations.
PROVISION FOR INCOME TAXES. Pro forma income taxes assume that PPI had
operated as a tax-paying entity for the years ended December 31, 1993, 1994,
1995 and the six months ended June 30, 1996, subject to an effective combined
tax rate for state and federal income taxes of 40% for all periods.
LIQUIDITY AND CAPITAL RESOURCES.
Working Capital and Short-term Financing:
As of June 30, 1996, PPI had a working capital deficit of $1,921,000. This
deficit is due to short-term financing used to invest in capital purchases. PPI
will seek to convert the $3,750,000 construction note related to HealthFirst
into a long-term note or mortgage. See "HealthFirst Management's Discussion and
Analysis of Financial Condition and Results of Operations." In August 1996,
Corvallis converted its $1,400,000 equipment credit facility to a four-year term
note. See "Corvallis Clinic Management's Discussion and Analysis of Financial
Condition and Results of Operations." See "Medford Clinic Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Management believes that working capital deficits are unlikely to continue
due to the receipt of management fees related to the New PC Management Agreement
and resulting financial discipline involved in governing the business aspects of
the New PCs through the Joint Management Board. See "Operation, Management and
Business of PPI Following the Merger."
Long-Term:
CAPITAL EXPENDITURES. Capital expenditures relating to HealthFirst,
Corvallis Clinic and Medford Clinic are described in "HealthFirst Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Corvallis Clinic Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Medford Clinic Management's Discussion and
Analysis of Financial Condition and Results of Operations." Capital expenditure
plans and projects will be approved by the Joint Management Boards of the New
PCs as part of the annual budgeting process. See "Operation, Management and
Business of PPI Following the Merger."
FINANCING ACTIVITIES. Management expects to obtain a combined short-term
working capital line of credit upon the Merger by combining the lines of credit
from each New PC. In addition, management is in the process of evaluating
various alternatives to financing the ongoing business needs of PPI and
Companies and potential acquisition strategies of PPI. Such alternatives include
but are not limited to, traditional commercial banks, private debt, private
equity, public equity or public debt. Any future
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acquisitions are expected to be funded through a combination of existing cash
and debt, new debt and the issuance of new PPI stock.
The existing debt obligations of the Companies are described in "HealthFirst
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Corvallis Clinic Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Medford Clinic Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Management believes that additional financing will be required to fund
planned capital expenditures over the next several years and potential
acquisition strategies of PPI.
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UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS OF PPI,
INCLUDING NOTES THERETO
The following pro forma selected financial information does not project the
future financial position of PPI whose securities are being exchanged pursuant
to the Reorganization and Merger Agreement as described in this Proxy Statement.
Such financial information is provided to show the effect of a combination of
past operations of each of the Companies, which will pay management fees to PPI
under the Management Agreements.
The business of PPI is to acquire the assets of multi-specialty medical
groups and provide operational and administrative services and facilities to the
physicians practicing exclusively through such medical groups. The relationship
between PPI and each such medical group is structured through practice
management agreements which provide, in general, for PPI (which owns certain
assets, including equipment and accounts receivable) to provide offices and
facilities, inventory and supplies, equipment, management and administrative
services to such medical group. Each medical group, in return, agrees to conduct
its practice of medicine exclusively in affiliation with PPI.
91
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
As explained elsewhere in this Joint Proxy Statement/Prospectus, the PC
Reorganization Transactions would result in a division of the current businesses
of HealthFirst Medical Group, P.C., The Corvallis Clinic, P.C. and Medford
Clinic, P.C.
Various business support functions along with substantially all of the
assets and liabilities of the three existing Companies would be transferred to
PPI in exchange for PPI Class A Common Stock. Under accounting rules prescribed
by the staff of the Securities and Exchange Commission in SAB 48, when a company
acquires assets from promoters and shareholders in exchange for stock just prior
to, or at the time of, its first public offering, such assets should generally
be recorded at the cost to each such promoter or shareholder. Each of the three
existing companies is involved as a promoter of the Merger and the related
first-time public registration of stock of PPI. Accordingly, the assets and
liabilities to be transferred from the Companies to PPI in connection with the
merger transactions will be recorded on the PPI balance sheet in the same
amounts as reflected on the balance sheets of the Companies at the effective
date of the merger and the PPI stock will be valued at the historic cost of the
net assets to be transferred.
The medical practice (i.e., physicians and medical service staff) would be
"spun off" to New PCs. The New PCs would then enter into New PC Management
Agreements with PPI for various management, finance and administrative support
services. PPI revenues under the Management Agreements would include (a)
reimbursement of all Manager's Expenses plus (b) a management fee equal to 16%
of the Distributable Profit Amount of the New PCs. "Distributable Profit Amount"
is defined as (i) New PC gross revenues, booked on an accrual basis, less
specified contractual discounts and bad debts, relating to services provided by
the New PCs, less (ii) Manager's Expenses. See "Operation, Management and
Business of PPI Following the Merger--Practice Management Agreement."
The amount available for provider compensation and benefits will be directly
effected by the amount of the management fee to be paid to PPI. Although the
impact can not be determined at this time, the amount available for provider
compensation and benefits may also be effected by merger synergies and
management's ability to reduce costs or enhance revenues.
The pro forma financial statements include the unaudited pro forma condensed
balance sheet of PPI as of June 30, 1996 and the unaudited pro forma condensed
statements of operations of PPI for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1996.
The unaudited condensed pro forma financial statements illustrate the
balance sheet of PPI as if the PC Reorganization Transactions and the Merger had
occurred on June 30, 1996. The unaudited condensed pro forma statements of
operations illustrate the operating results of PPI for the periods presented as
if the PC Reorganization Transactions and the Merger had occurred and the New PC
Management Agreements were in effect throughout the periods presented.
The unaudited condensed pro forma financial statements have been prepared by
PPI based on the historical financial statements of PPI and the Companies and
their predecessors included elsewhere in this Joint Proxy Statement/Prospectus
and assumptions deemed appropriate by PPI. These unaudited condensed pro forma
financial statements may not be indicative of actual results if the transactions
contemplated by the Reorganization and Merger Agreement had occurred on the
dates indicated or which may be realized in the future. Neither expected
benefits and cost reductions anticipated nor future corporate costs of PPI have
been reflected in the accompanying unaudited condensed pro forma financial
statements.
92
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1996
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST CORVALLIS MEDFORD ADJUSTMENTS PPI PRO FORMA
----- ----------- --------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term
investments.................... $-- $ 3,560 $ 71 $ 2,086 $-- $ 5,717
Accounts receivable
Gross accounts receivable...... 3 10,482 8,548 10,485 -- 29,518
Reserves....................... -- (2,036) (2,627) (3,124) -- (7,787)
Receivable, net.............. 3 8,446 5,921 7,361 -- 21,731
Other current assets........... -- 367 332 542 -- 1,241
----- ----------- --------- ------- ----------- -------------
Total current assets......... 3 12,373 6,324 9,989 -- 28,689
PROPERTY, PLANT AND EQUIPMENT:
Gross property................... -- 24,696 27,869 10,500 -- 63,065
Accumulated depreciation......... -- (4,977) (8,426) (4,835) -- (18,238)
Property, plant and
equipment, net............. -- 19,719 19,443 5,665 -- 44,827
Other noncurrent assets.......... -- 367 960 301 -- 1,628
----- ----------- --------- ------- ----------- -------------
Total assets................. 3 32,459 26,727 15,955 -- 75,144
----- ----------- --------- ------- ----------- -------------
----- ----------- --------- ------- ----------- -------------
CURRENT LIABILITIES:
Accounts and notes payable....... -- 1,722 985 790 -- 3,497
Other current liabilities........ -- 13,193 7,108 6,812 -- 27,113
----- ----------- --------- ------- ----------- -------------
Total current liabilities.... -- 14,915 8,093 7,602 -- 30,610
LONG-TERM DEBT, net of current
portion.......................... -- 4,160 554 4,437 -- 9,151
CAPITAL AND DIRECT FINANCING LEASE
OBLIGATIONS, net of current
portion.......................... -- 4,470 14,098 -- -- 18,568
OTHER LONG-TERM LIABILITIES........ -- 3,867 1,960 597 -- 6,424
REDEEMABLE STOCK................... -- -- 6,486 -- (6,486)(A) --
STOCKHOLDERS' EQUITY:
Common stock..................... -- 906 -- 1 (842)(A) 65
Additional paid-in capital....... 700 122 -- -- 10,201(A) 11,023
Retained earnings (deficit)...... (697) 4,019 (4,464) 3,318 (2,873)(A) (697)
----- ----------- --------- ------- ----------- -------------
Total liabilities and
equity..................... 3 32,459 26,727 15,955 -- 75,144
----- ----------- --------- ------- ----------- -------------
----- ----------- --------- ------- ----------- -------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
93
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST CORVALLIS MEDFORD SUBTOTAL
----- ----------- SUBURBAN --------- ------- ----------- ADJUSTMENTS
----------- -----------
(HH) (II)
<S> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES....................... $-- $28,707 $ 1,232 $24,029 $20,506 $74,474 $(74,474)(AA)
56,753(BB)
Less Provider Compensation and
Benefits......................... -- 12,426 373 6,342 5,709 24,850 (24,850)(CC)
----- ----------- ----------- --------- ------- ----------- -----------
Net Revenues Less Provider
Compensation and Benefits...... -- 16,281 859 17,687 14,797 49,624 7,129
TOTAL OPERATING EXPENSES......... -- 20,248 1,238 17,375 14,087 52,948 --
OTHER (INCOME) EXPENSES............ -- (74) (11) 382 133 430 34(DD)
REORGANIZATION COSTS............... 697 -- -- -- -- 697 (697)(EE)
----- ----------- ----------- --------- ------- ----------- -----------
Income (Loss) Before Income
Taxes.......................... (697) (3,893) (368) (70) 577 (4,451) 7,792
INCOME TAX
(BENEFIT) 1,336(FF)
EXPENSE.......................... -- (1,348) -- -- 231 (1,117) 1,117(GG)
----- ----------- ----------- --------- ------- ----------- -----------
Net Income (Loss)................ $(697) $(2,545) $ (368) $ (70) $ 346 $(3,334) $ 5,339
----- ----------- ----------- --------- ------- ----------- -----------
----- ----------- ----------- --------- ------- ----------- -----------
<CAPTION>
PPI PRO FORMA
-------------
<S> <C>
NET REVENUES....................... $ 56,753
Less Provider Compensation and
Benefits......................... --
-------------
Net Revenues Less Provider
Compensation and Benefits...... 56,753
TOTAL OPERATING EXPENSES......... 52,948
OTHER (INCOME) EXPENSES............ 464
REORGANIZATION COSTS............... --
-------------
Income (Loss) Before Income
Taxes.......................... 3,341
INCOME TAX
(BENEFIT)
EXPENSE.......................... 1,336
-------------
Net Income (Loss)................ $ 2,005
-------------
-------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
94
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST CORVALLIS MEDFORD SUBTOTAL
----- ----------- SUBURBAN --------- ------- ----------- ADJUSTMENTS
----------- -----------
(HH) (II)
<S> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES....................... $-- $37,652 $15,418 $39,174 $38,966 $ 131,210 ($131,210)(AA)
101,059(BB)
Less Provider Compensation and
Benefits......................... -- 9,530 3,916 13,209 11,239 37,894 (37,894)(CC)
----- ----------- ----------- --------- ------- ----------- -----------
Net Revenues Less Provider
Compensation and Benefits...... -- 28,122 11,502 25,965 27,727 93,316 7,743
TOTAL OPERATING EXPENSES........... -- 27,593 12,770 27,779 26,277 94,419 --
OTHER (INCOME) EXPENSES............ -- 29 185 293 390 897 68(DD)
----- ----------- ----------- --------- ------- ----------- -----------
Income (Loss) Before Income
Taxes.......................... -- 500 (1,453) (2,107) 1,060 (2,000) 7,675
INCOME TAX
(BENEFIT) 2,270(FF)
EXPENSE.......................... -- 208 (610) -- 408 6 (6)(GG)
----- ----------- ----------- --------- ------- ----------- -----------
Net Income (Loss)................ $-- $ 292 $ (843) $(2,107) $ 652 $ (2,006) $ 5,411
----- ----------- ----------- --------- ------- ----------- -----------
----- ----------- ----------- --------- ------- ----------- -----------
<CAPTION>
PPI PRO FORMA
-------------
<S> <C>
NET REVENUES....................... $101,059
Less Provider Compensation and
Benefits......................... --
-------------
Net Revenues Less Provider
Compensation and Benefits...... 101,059
TOTAL OPERATING EXPENSES........... 94,419
OTHER (INCOME) EXPENSES............ 965
-------------
Income (Loss) Before Income
Taxes.......................... 5,675
INCOME TAX
(BENEFIT)
EXPENSE.......................... 2,270
-------------
Net Income (Loss)................ $ 3,405
-------------
-------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
95
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST CORVALLIS MEDFORD SUBTOTAL
----- ----------- SUBURBAN --------- ------- ----------- ADJUSTMENTS
----------- -----------
(HH) (II)
<S> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES....................... $-- $32,276 $14,694 $35,344 $32,327 $ 114,641 ($114,641)(AA)
82,793(BB)
Less Provider Compensation and
Benefits......................... -- 8,376 3,514 13,729 9,248 34,867 (34,867)(CC)
----- ----------- ----------- --------- ------- ----------- -----------
Net Revenues Less Provider
Compensation and Benefits...... 23,900 11,180 21,615 23,079 79,774 3,019
TOTAL OPERATING EXPENSES........... -- 20,648 10,589 22,334 22,457 76,028 --
OTHER (INCOME) EXPENSE............. -- (101) (55) 558 297 699 68(DD)
----- ----------- ----------- --------- ------- ----------- -----------
Income (Loss) Before Income
TAXES.......................... -- 3,353 646 (1,277) 325 3,047 2,951
INCOME TAX
(BENEFIT) 2,399(FF)
EXPENSE.......................... -- 1,416 263 -- 133 1,812 (1,812)(GG)
----- ----------- ----------- --------- ------- ----------- -----------
Net Income (Loss)................ $-- $ 1,937 $ 383 $(1,277) $ 192 $ 1,235 $ 2,364
----- ----------- ----------- --------- ------- ----------- -----------
----- ----------- ----------- --------- ------- ----------- -----------
<CAPTION>
PPI PRO FORMA
-------------
<S> <C>
NET REVENUES....................... $ 82,793
Less Provider Compensation and
Benefits......................... --
-------------
Net Revenues Less Provider
Compensation and Benefits...... 82,793
TOTAL OPERATING EXPENSES........... 76,028
OTHER (INCOME) EXPENSE............. 767
-------------
Income (Loss) Before Income
TAXES.......................... 5,998
INCOME TAX
(BENEFIT)
EXPENSE.......................... 2,399
-------------
Net Income (Loss)................ $ 3,599
-------------
-------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
96
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST CORVALLIS MEDFORD SUBTOTAL
----- ----------- SUBURBAN --------- ------- ----------- ADJUSTMENTS
----------- -----------
(HH) (II)
<S> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES....................... $-- $24,398 $13,197 $29,939 $23,074 $90,608 $(90,608)(AA)
67,318(BB)
Less Provider Compensation and
Benefits......................... -- 6,278 3,294 7,122 7,009 23,703 (23,703)(CC)
----- ----------- ----------- --------- ------- ----------- -----------
Net Revenues Less Provider
Compensation and Benefits...... -- 18,120 9,903 22,817 16,065 66,905 413
TOTAL OPERATING EXPENSES........... -- 15,963 10,173 20,159 15,805 62,100 --
OTHER (INCOME) EXPENSES............ -- (46) (23) 719 132 782 68(DD)
----- ----------- ----------- --------- ------- ----------- -----------
Income (Loss) Before Income
Taxes.......................... -- 2,203 (247) 1,939 128 4,023 345
INCOME TAX
(BENEFIT) 1,747(FF)
EXPENSE.......................... -- 889 (99) 759 44 1,593 (1,593)(GG)
----- ----------- ----------- --------- ------- ----------- -----------
Net Income (Loss)................ $-- $ 1,314 $ (148) $ 1,180 $ 84 $ 2,430 $ 191
----- ----------- ----------- --------- ------- ----------- -----------
----- ----------- ----------- --------- ------- ----------- -----------
<CAPTION>
PPI PRO FORMA
-------------
<S> <C>
NET REVENUES....................... $ 67,318
Less Provider Compensation and
Benefits......................... --
-------------
Net Revenues Less Provider
Compensation and Benefits...... 67,318
TOTAL OPERATING EXPENSES........... 62,100
OTHER (INCOME) EXPENSES............ 850
-------------
Income (Loss) Before Income
Taxes.......................... 4,368
INCOME TAX
(BENEFIT)
EXPENSE.......................... 1,747
-------------
Net Income (Loss)................ $ 2,621
-------------
-------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
97
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The pro forma condensed balance sheet has been presented as if the proposed
reorganization transaction had taken place on June 30, 1996.
The pro forma condensed statements of operations have been presented as if
the proposed reorganization had taken place and that the proposed Management
Agreement was in effect throughout the periods presented.
ADJUSTMENTS TO PRO FORMA BALANCE SHEET
Under accounting rules prescribed by the staff of the Securities and
Exchange Commission in SAB 48, when a company acquires assets from promoters and
shareholders in exchange for stock just prior to, or at the time of, its first
public offering, such assets should generally be recorded at the cost to each
such promoter or shareholder. Each of the three existing Companies is involved
as a promoter of the Merger and the related first-time public registration of
stock of PPI. Accordingly, the assets and liabilities to be transferred from the
Companies to PPI in connection with the merger transactions will be recorded on
the PPI balance sheet in the same amounts as reflected on the balance sheets of
the Companies at the effective date of the merger and the PPI stock will be
valued at the historic cost of the net assets to be transferred.
<TABLE>
<S> <C>
(A) The adjustments reflect the effect of the reorganization transaction on the
shareholders' equity accounts which includes the issuance of 6,500,250 shares of PPI
common stock in exchange for all classes of the stock of the three clinics. These PPI
shares will be recorded at par value of $.01 per share and all of the remaining
balances in the three clinics capital accounts will be reflected as paid-in-capital.
</TABLE>
ADJUSTMENTS TO PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<S> <C>
The unaudited condensed pro forma statements of operations reflect the following
adjustments:
(AA) Represents the elimination of revenues relating to medical services to be provided
by the New PCs.
(BB) Represents the revenues to be generated by PPI under the terms of the Management
Agreement.
(CC) Eliminates the previously recorded provider compensation and benefits of the
participating clinics. Under the terms of the merger and reorganization, the medical
practice would be spun off to the New PCs. The New PCs would be responsible for the
costs related to provider compensation and benefits. The amount available for
provider compensation and benefits will be directly effected by the amount of the
management fee to be paid to PPI. Although the impact can not be determined at this
time, the amount available for provider compensation and benefits may also be
effected by merger synergies and management's ability to reduce costs or enhance
revenues.
(DD) Represents the pro forma impact of compensation expense related to restricted stock
awards issued by PPI.
</TABLE>
98
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
(EE) Eliminates the impact on operations of nonrecurring costs incurred in connection
with the reorganization transaction. Substantially all of these costs are related to
services from accountants, attorneys and other consultants to provide legal
documents, accounting and other information required for the reorganization and
merger transaction. Additional reorganization and merger costs of approximately $2.8
million are expected to be incurred between June 30, 1996 and the effective date of
the merger. Such costs have not been reflected in the pro forma financial
statements.
(FF) The pro forma income taxes of PPI at an estimated 40% combined federal and state tax
rate.
(GG) Represents the elimination of previously recorded income tax provision (benefit) of
the participating clinics.
(HH) Suburban was acquired by HealthFirst on February 1, 1996 in a purchase transaction.
Accordingly, Suburban's operating results subsequent to the purchase date are
included with HealthFirst. Suburban's revenues and expenses prior to that date are
shown in the Suburban column.
A reconciliation between the pro forma statements of operations and pro forma
results disclosed in Note 12 to the HealthFirst financial statements follows:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -----------------
<S> <C> <C> <C>
Net Revenues Less Provider Compensation and
Benefits--
Per pro forma statement of operations:
HealthFirst................................... $ 28,122 $ 16,281
Suburban...................................... 11,502 859
------- -------
Per Note 12................................... $ 39,624 $ 17,140
------- -------
------- -------
</TABLE>
<TABLE>
<S> <C>
(II) Neither enhanced revenues and cost reductions anticipated nor future corporate costs
of PPI have been included as pro forma adjustments.
</TABLE>
99
<PAGE>
BUSINESS OF HEALTHFIRST
GENERAL
HealthFirst, an Oregon professional corporation founded in 1909, is a
multi-specialty group that provides a broad array of medical services in several
facilities in the Portland area. Medical specialties offered by HealthFirst
include critical care, dermatology, family practice, gastroenterology,
gynecology, hematology, infectious disease, internal medicine, oncology,
obstetrics, pediatrics, podiatry, rheumatology and surgery. In addition,
HealthFirst offers certain office-based ancillary services, such as basic
clinical laboratory and radiology services. HealthFirst currently operates in 11
practice sites located in Portland, Oregon and surrounding communities
(including Beaverton, Gresham, Lake Oswego, Tualatin and Tigard, Oregon). As of
November 1, 1996, HealthFirst employed 121 full-time and part-time physicians,
of which 91 are primary care physicians (internal medicine, family practice and
pediatrics) and 30 are specialists. HealthFirst's patient population consists in
large part of enrollees of HMOs, PPOs and other health plans, but HealthFirst
also provides a significant amount of services to patients covered by other
payors such as federal and state programs, self-insured employers and
traditional indemnity insurance payors.
Since its formation HealthFirst has been the successor to a number of
individual physician practices and medical groups; in particular, it has
acquired several medical groups over the past five years. HealthFirst has grown,
in part, by acquiring or affiliating with medical groups that complement
HealthFirst's market strategies. The direct predecessor of HealthFirst is
Metropolitan Clinic, P.C. ("Metropolitan"). HealthFirst changed its name from
Metropolitan Clinic, P.C. in February 1996 as a result of the business
combination of Metropolitan with another medical group, Suburban Medical Clinic,
Inc. ("Suburban"). In connection with the transaction, Metropolitan was renamed
"HealthFirst Medical Group, P.C.," Suburban was reorganized as "HealthFirst
Management Services, Inc.," an Oregon business corporation ("HealthFirst
Management"), and HealthFirst acquired all of the issued and outstanding shares
of HealthFirst Management. Also in connection with the transaction, all of the
physicians who were previously shareholders of Suburban became shareholders of
HealthFirst. All shareholders of Suburban received HealthFirst Series 2 Shares
in exchange for their Suburban shares.
HealthFirst owns all of the issued and outstanding shares of stock in
HealthFirst Management. HealthFirst Management currently provides various
management services to HealthFirst pursuant to a written Management Agreement.
Under such agreement, HealthFirst Management manages HealthFirst's agreements
and relationships with health plans, other payors and providers and HealthFirst
agrees to provide the necessary medical services under such agreements. The
current term of such agreement expires December 31, 1996. Such agreement will be
terminated in connection with the Merger. It is anticipated that HealthFirst
Management may be dissolved in connection with or after the Merger.
HealthFirst Properties, L.L.C., an Oregon limited liability company
("HealthFirst Properties"), was formed in January 1996 to acquire all of the
real property then owned by HealthFirst. Many of the current shareholders of
HealthFirst are members of HealthFirst Properties. Each member of HealthFirst
Properties purchased at least 500 units in such entity at a price of $20 per
unit. All funds received by HealthFirst Properties from the sale of the units,
net of costs, were used as a down payment for the purchase of such properties.
HealthFirst and HealthFirst Properties entered into a Land Sale Contract, dated
May 1, 1996, pursuant to which HealthFirst Properties holds equitable title to
three medical office buildings. Under the terms of the Land Sale Contract,
however, HealthFirst will retain legal title to the properties until a 20-year
installment note is paid in full by HealthFirst Properties. During the term of
such agreement, HealthFirst leases back office space from HealthFirst
Properties.
In May 1995, HealthFirst entered into a strategic alliance in the form of an
Oregon business corporation named Northwest Physician Alliance, Inc. (the
"Alliance"). The equity owners of the Alliance are Blue Cross/Blue Shield
("BCBS") of Oregon, Legacy Health Systems ("Legacy"), Portland Adventist Medical
Center, HealthFirst and two other Portland-area medical groups. The Alliance
contemplates that Legacy, HealthFirst and the other participating medical groups
will provide or arrange for substantially all
100
<PAGE>
of the professional, institutional and ancillary health care services required
by enrollees of BCBS' prepaid health plans in a defined service area.
The Alliance is intended to collaboratively manage "Alliance health plans,"
defined as all current and future HMO and HMO-type health plans offered by HMO
Oregon or Health Maintenance of Oregon, and all current and future managed care
plans offered by BCBS in which Legacy serves as the strategic institutional
health care provider. The Alliance service area includes Multnomah, Clackamas,
Washington, Yamhill, Columbia and North Marion counties in Oregon and Washington
State's Clark County.
In connection with the Alliance, HealthFirst also became a member of an
entity called Northwest Group Practices' Association, L.L.C., an Oregon limited
liability company ("NGPA"). NGPA is owned by three medical groups and was formed
to provide management services to the Alliance.
STRATEGY
HealthFirst's strategy is to provide high-quality, cost-effective medical
care in an expanding geographic area. HealthFirst's multi-specialty physician
clinics are designed to meet the medical needs of certain markets within the
Portland area. HealthFirst's strategy also involves affiliating with primary
care providers and physicians with specialties which are needed by HealthFirst.
Over the past five years, HealthFirst's strategy has involved increasing its
geographic service area to strengthen its position with managed care providers
and being a founding member of the Alliance with other local providers and BCBS.
HealthFirst believes, however, that its attractiveness to managed care payors
would increase if it served a wider geographic area rather than a larger
percentage of Portland-area managed care enrollees. Consequently, HealthFirst
has sought its current partners for the Merger described herein.
HealthFirst's operational goals for 1996 include the following: (1) remodel
the Powell Valley facility, the Lake Oswego facility and the Northwest Portland
facility to accommodate additional providers; (2) expand the office space in the
Albers Mill building; (3) expand technological capabilities, including expansion
of the telephone system and the computer system; (4) plan the implementation of
HealthFirst's electronic medical records system; and (5) achieve specified
retained earnings targets as a percentage of net revenues.
GOVERNMENT REGULATION
HealthFirst is subject to federal and state laws regulating the
relationships among providers of health care services, physicians and other
clinicians. These laws include the fraud and abuse provisions of the Medicare
and Medicaid statutes, which prohibit the solicitation, payment, receipt or
offering of any direct or indirect remuneration for the referral of Medicare or
Medicaid patients or for the recommending, leasing, arranging, ordering or
purchasing of Medicare or Medicaid covered services. Other laws impose
significant penalties for false or improper billings for physician services and
impose restrictions on physician referrals for designated health services
reimbursable under the Medicare and Medicaid programs to entities with which
they have financial relationships. See "Physician Practice Management
Industry--Government Regulation". While HealthFirst believes it is in material
compliance with applicable laws and regulations, there is no assurance that
HealthFirst's present or past operations will not be subjected to scrutiny or
legal challenge.
101
<PAGE>
SERVICES PROVIDED
HealthFirst provides the following professional services:
<TABLE>
<S> <C>
Critical Care Internal Medicine
Dermatology Obstetrics
Family Practice Oncology
Gastroenterology Pediatrics
Gynecology Podiatry
Hematology Rheumatology
Infectious Disease Surgery
</TABLE>
Under capitated and other prepaid contracts, HealthFirst provides or
arranges for all physician services and receives a fixed monthly capitation
payment (or similar prepayment) from health plans for each member who chooses a
HealthFirst physician as his or her primary care physician. HealthFirst serves
capitated patients through a number of health plans, including those operated by
HMO Oregon, PacifiCare, Providence Health Plans and others, including carriers
of Medicare-risk products and Oregon Health Plan. HealthFirst accepts assignment
from Medicare as full compensation for services provided to Medicare patients,
except for applicable deductibles and copayments. Other HealthFirst fee
arrangements include (a) contracts with providers based on fee schedules
(including Oregon Health Plan), (b) affiliations with certain PPOs and employers
which pay based on fee schedules or a specified percentage of ordinary and
customary charges of HealthFirst, and (c) fee-for-service payments from a small
percentage of patients and traditional indemnity insurers.
Most of HealthFirst's patients are covered under either commercial or senior
prepaid health plans. Enrollment is categorized as "commercial" for enrollees
under the age of 65 whose health coverage is generally sponsored by employees or
"senior" for retired enrollees over the age of 65 who are covered by Medicare.
Higher capitation rates are typically received for senior patients because their
medical needs are generally greater and, consequently, the cost of covered care
for such patients is higher. To the extent that enrollees require more care than
is anticipated or require supplemental medical care which is not otherwise
reimbursed by the health plans or other payors, aggregate capitation payments
may be insufficient to cover the costs associated with the treatment of
enrollees. If such revenue is insufficient, HealthFirst maintains stop-loss
coverage which mitigates the effect of occasional high utilization of health
care services.
Generally, HealthFirst's contracts with health plans and other payors come
up for renewal each year. Managed care contracting has become very competitive
and reimbursement schedules are being reduced to reimbursement levels at or
slightly above the amounts paid by Medicare. If such contracts are not renewed
or replaced by other programs that provide a large volume of business,
HealthFirst's revenues and profits could be adversely affected. HealthFirst's
management expects that its substantial payors will elect to renew their
contracts, but no assurances can be given in this regard.
In 1995, $14,817,480 (or approximately 39.4%) of HealthFirst net patient
revenues came from capitated (prepaid) arrangements; and $22,834,493 (or
approximately 60.6%) of net revenues derived from PPOs, other contractual
relationships, individuals or private insurance carriers (fee-for-service). In
1994, $13,463,161 (or approximately 41.7%) of HealthFirst net patient revenues
came from capitated (prepaid) arrangements; $18,813,260 (or approximately 58.3%)
of net revenues derived from PPOs, other contractual relationships, individuals
or private insurance carriers (fee-for-service).
Medically necessary services provided to participants in the federal
Medicare program are reimbursed only: (i) if such services have been approved
for reimbursement by HCFA, and (ii) in the amount authorized on a geographical
basis by Medicare intermediaries (contracted insurance companies). The services
currently provided by HealthFirst have been approved for reimbursement by HCFA.
There are significant differences in Medicare reimbursement rates for services
in different locations. Generally, Medicare reimbursement rates are lower than
the reimbursement rates paid by third-party insurance carriers.
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<PAGE>
ENROLLEES OF AT-RISK HEALTH PLANS UNDER CONTRACT WITH
HEALTHFIRST OR HEALTHFIRST MANAGEMENT
(AS OF JUNE 30, 1996)
<TABLE>
<CAPTION>
ENROLLED % OF TOTAL
----------- -----------
<S> <C> <C>
Commercial.............................................................. 46,688 72.8
Medicaid................................................................ 6,275 9.8
Medicare................................................................ 11,202 17.4
----------- -----
TOTAL................................................................... 64,165 100.0%
----------- -----
----------- -----
</TABLE>
MARKETING AND DEVELOPMENT
HealthFirst markets its services by offering a wide variety of locations (11
in the Portland Metropolitan Area) and choice of 121 physicians in 11 medical
and surgical specialties. HealthFirst also offers two geographically dispersed
urgent care centers which are open on weekends and evenings.
In 1995, HealthFirst became fully accredited by the Medical Quality
Commission ("MQC") to become one of three physician practice groups in Oregon
and approximately 25 physician practice groups in the United States to be so
accredited. The accreditation process reviews 150 quality and service measures.
HealthFirst regularly measures patient satisfaction and has comprehensive
quality improvement programs.
HealthFirst offers its patients a variety of educational programs, including
programs on diet, diabetes, and hypertension, supported by both classes and
written materials.
A senior executive of HealthFirst is designated to seek and negotiate
managed care contracts as well as to further develop programs such as
occupational medicine. HealthFirst regularly evaluates adding new services as
well as providers in new specialties.
COMPETITION
The Portland, Oregon area is a highly competitive market for physician
services. Primary competitors of HealthFirst include integrated medical groups
such as MedPartners, Cascade Medical Group, Providence Medical Group, The
Portland Clinic, Portland Adventist Medical Group and others. Competitors also
include hospital systems which employ primary care physicians, IPAs, staff model
HMOs (such as Kaiser) and academic medical centers. In light of its size,
however, HealthFirst is a significant health care provider in its relevant
market. HealthFirst competes for contracts with certain national provider
entities (such as MedPartners) and many regional and local providers of
physician management services. Although the bases of competition may vary,
competition is generally based on cost and quality of care.
In terms of physician practice management companies, only two, MedPartners
and AORI have a presence in HealthFirst's service area. Both of these publicly
traded PPMs have holdings in the Portland, Oregon market. MedPartners operates a
growing multi-specialty group practice of approximately 70 physicians in the
Portland market. MedPartners has been an aggressive suitor of groups of
physicians in the Portland market, and recently acquired a group of OB/Gyn
physicians who might have joined HealthFirst. AORI has during the past several
years purchased two high-profile oncology providers in the Portland market.
These practices are in direct competition with HealthFirst's oncology practice.
Further, PhyCor, another publicly traded PPM, is attempting to enter the PPM
market in and around Portland.
EMPLOYEES
PROVIDER EMPLOYEES.
As of November 1, 1996, HealthFirst had 97 full-time and 24 part-time
physician employees. HealthFirst physicians typically initially sign one-year
associate employment contracts. Such contracts offer the physicians a specified
base salary, a signing bonus, and eligibility for an incentive bonus. The
physicians
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are also eligible to receive benefits such as health, dental, life, and
professional liability insurance, paid time off, and an allowance for continuing
medical education and other professional expenses. HealthFirst shareholder
physicians vote on whether to offer shares to an associate physician after two
years of service as an associate physician. In order for an associate physician
to become a shareholder of HealthFirst, such physician must sign a new
shareholder employment agreement. HealthFirst physicians currently are not
subject to a covenant not to compete with medical services provided by
HealthFirst.
As of November 1, 1996, there were 14 non-physician providers under contract
with HealthFirst. None have covenants not to compete. Shareholder contracts for
eligible non-physician employees generally are similar to the associate version
except for compensation and certain other provisions.
NON-PROVIDER EMPLOYEES.
As of November 1, 1996, HealthFirst had 577 full-time and 57 part-time
non-provider employees. Of the non-physician clinical and administrative support
personnel, 429 were full-time employees and 53 were part-time employees. The
remainder were corporate personnel, consisting of 148 full-time employees and
three part-time employees. None of HealthFirst's employees are represented by a
labor union. Management believes its employee relations to be satisfactory.
INSURANCE
The business of HealthFirst entails an inherent risk of claims of provider
professional liability. To protect its overall operations from such potential
liabilities, HealthFirst maintains professional liability insurance and general
liability insurance on a claims-made basis, with policy coverage of $5 million
per claim, and no annual aggregate maximum benefit, for claims made against
HealthFirst and its employees, except that the claims made professional
liability insurance policy maintained by the former physician-employees of
Suburban had coverage limits of $2 million per claim and $4 million aggregate
maximum benefit. HealthFirst also carries workers' compensation insurance and
maintains multiperil liability, fiduciary liability, employee dishonesty,
professional liability, general liability, excess professional liability and
director's and officers' insurance, with coverage limits HealthFirst believes to
be customary and reasonable for a business of its kind. Management does not
believe the related exposure is significant; however, there can be no assurance
that a future claim will not exceed the limits of available insurance coverage
or that such coverage will continue to be available.
PROPERTIES AND FACILITIES
HealthFirst conducts its operations out of offices located in locations in
the greater Portland area, identified as follows: Albers Mill, Broadway,
Gateway, Gresham, Hollywood, Northwest, Lake Oswego, Powell Valley, Tualatin,
Tigard, Beaverton and Wilshire. The administrative headquarters of HealthFirst
are located in Portland in the Gateway building, with certain administrative
functions located in the Albers Mill and other locations. HealthFirst and
HealthFirst Properties entered into a sale-leaseback transaction pursuant to a
Land Sale Contract, dated May 1, 1996, pursuant to which HealthFirst Properties
obtained equitable title to three medical office buildings (the Broadway,
Beaverton and Tualatin buildings) and leased such properties back to
HealthFirst. Under the terms of the Land Sale Contract, however, HealthFirst
will retain legal title to the properties until a 20-year installment note is
paid in full by HealthFirst Properties. HealthFirst leases each of its other
locations.
INFORMATION SYSTEMS
HealthFirst has developed and maintains integrated information systems to
support its growth and acquisition plans. HealthFirst's overall systems design
is open, modular and flexible. HealthFirst believes that it has configured its
systems to give physicians efficient and rapid access to complex clinical data.
HealthFirst is committed to the development of integrated and comprehensive
information systems. The
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current capabilities include the practice management functions of registration,
scheduling and appointments, electronic claims submission and remittance.
Managed care functions include referrals, eligibility, claims payment and
reporting.
Extensive efforts are underway to prepare for the implementation of an
electronic medical records system and a lab information system.
Effective and efficient access to key clinical patient data is critical in
improving cost and quality outcomes as HealthFirst enters into more capitation
contracts. HealthFirst attempts to utilize its existing information systems to
improve productivity, manage complex reimbursement procedures, measure patient
care satisfaction and outcomes of care, and integrate information from various
sources. These systems allow HealthFirst to analyze clinical and cost data so
that it is able to determine thresholds of profitability under various
capitation arrangements.
LEGAL PROCEEDINGS
HealthFirst is engaged in the defense of lawsuits arising in the ordinary
course and conduct of its business (including cases naming Suburban or
Metropolitan a defendant). These proceedings have all arisen out of the ordinary
course of its business and HealthFirst believes that none of these proceedings
will have a material adverse effect on HealthFirst.
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DESCRIPTION OF CAPITAL STOCK OF HEALTHFIRST
The authorized capital stock of HealthFirst as of November 1, 1996 consists
of 1,400,000 shares of Class A Common Voting Shares, no par value, of which
800,000 shares are Series 1 Class A Shares ("HealthFirst Series 1 Shares"),
200,000 shares are Series 2 Class A Shares ("HealthFirst Series 2 Shares"),
200,000 shares are Series 3 Class A Shares, 100,000 shares are Series 4 Class A
Shares and 100,000 shares are Series 5 Class A Shares. As of November 1, 1996
there are issued and outstanding 7,000 HealthFirst Series 1 Shares and 2,200
HealthFirst Series 2 Shares. All of the outstanding HealthFirst Series 1 Shares
and HealthFirst Series 2 Shares have been validly issued and are fully paid and
nonassessable. It is anticipated that HealthFirst will grant, prior to the
Effective Time, New Options exercisable for up to 1,704.5 shares of HealthFirst
Series 1 Shares. There are no outstanding options, warrants, subscriptions,
conversions or other rights, agreements or commitments obligating HealthFirst to
issue any additional HealthFirst Series 1 Shares or HealthFirst Series 2 Shares
or any other securities convertible into, exchangeable for or evidencing the
right to subscribe for any HealthFirst Series 1 Shares or HealthFirst Series 2
Shares. There are no voting trusts or other agreements or understandings to
which HealthFirst is a party with respect to the voting of HealthFirst Series 1
Shares or HealthFirst Series 2 Shares. Cash dividends were not declared on
common equity of HealthFirst in the 1995 or 1994 fiscal years.
The Restated Articles of HealthFirst provide that the shareholders do not
have any preemptive rights and that such shareholders cannot cumulate their
votes for the election of directors. HealthFirst Series 1 Shares, HealthFirst
Series 2 Shares and HealthFirst Series 3 Shares have identical voting rights but
different redemption rights. HealthFirst Series 1 Shares have a redemption value
of $100 per share, not to exceed $10,000 per holder of such share, HealthFirst
Series 2 Shares have a redemption value of $150, not to exceed $15,000 per
holder of such share, HealthFirst Series 3 Shares have a redemption value of
$230, not to exceed $23,000 per holder of such share. The redemption value is
paid when a shareholder dies, retires or relinquishes such shares for any reason
other than in connection with the formation of a physician practice management
company. Such the redemption rights of shareholders of HealthFirst do not apply
to the Merger Transactions.
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<PAGE>
SELECTED FINANCIAL DATA OF HEALTHFIRST
The following table sets forth selected financial data which have been
derived from the consolidated financial statements as of and for the years ended
December 31, 1991 through 1995. The Consolidated Balance Sheets as of December
31, 1994 and 1995 and the related Consolidated Statements of Operations,
Stockholders' Equity and Cash Flows for the years ended December 31, 1993
through 1995 have been audited by Arthur Andersen LLP, Independent Accountants.
The financial statements as of and for the six months ended June 30, 1995 and
1996 have been derived from the unaudited consolidated financial statements of
HealthFirst which, in the opinion of management, include all adjustments (which
consist of only normal recurring adjustments) necessary for a fair presentation
of the information set forth therein. The financial statements for the six
months ended June 30, 1996 include the acquired business of Suburban. The
following data should be read in conjunction with "HealthFirst Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and the notes thereto included elsewhere
in this document.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31 ENDED JUNE 30
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996(1)
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Fee-For-Service, net.............................. $ 7,868 $ 9,395 $ 13,505 $ 18,813 $ 22,835 $ 10,749 $ 15,195
Prepaid Health Care............................... 6,139 8,261 10,893 13,463 14,817 7,250 13,511
Total Net Revenues................................ 14,007 17,656 24,398 32,276 37,652 17,999 28,706
Less Provider Compensation and Benefits(2)........ (4,566) (5,586) (6,278) (8,375) (9,530) (4,682) (12,426)
Net Revenue Less Provider Compensation and
Benefits......................................... 9,441 12,070 18,120 23,901 28,122 13,317 16,280
OPERATING EXPENSES:
Clinic Salaries, Wages and Benefits............... $ 3,234 $ 3,879 $ 6,276 $ 8,614 $ 11,737 $ 5,060 $ 7,747
Purchased Medical Services........................ 1,962 2,836 3,157 3,530 4,253 1,903 4,131
Medical and Office Supplies....................... 1,042 1,429 2,245 3,076 4,377 1,811 2,671
General and Administrative........................ 1,176 1,321 2,471 3,200 4,491 2,014 3,368
Lease and Rent Expense............................ 283 341 608 655 853 431 831
Provision for Uncollectible Accounts.............. 369 446 696 936 1,146 617 732
Depreciation and Amortization..................... 433 328 510 637 736 366 768
--------- --------- --------- --------- --------- --------- ---------
Total Operating Expenses.......................... 8,499 10,580 15,963 20,648 27,593 12,202 20,248
Operating Income (Loss) (2)....................... 942 1,490 2,157 3,253 529 1,115 (3,968)
Other Non-Operating Income........................ 24 36 113 189 121 55 454
Interest Income................................... 34 51 115 98 39 21 49
Interest Expense.................................. 182 219 182 186 189 121 428
--------- --------- --------- --------- --------- --------- ---------
Income (Loss) Before Taxes........................ 818 1,358 2,203 3,354 500 1,070 (3,893)
Income Tax Expense (Benefit)...................... 425 715 889 1,416 208 428 (1,348)
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) (2)............................. 393 643 1,314 1,938 292 642 (2,545)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
AS OF DECEMBER 31 AS OF JUNE 30
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working Capital (Deficit)......................... $ 1,100 $ 1,339 $ 1,882 $ 1,961 $ (1,507) $ 527 $ (2,542)
Total Assets...................................... 9,048 10,407 11,742 16,848 21,075 16,136 32,459
Long-Term Debt, net............................... 2,836 2,252 2,223 1,731 3,711 2,357 4,160
Capital and Direct Financing Lease Obligations,
net.............................................. -- -- -- -- -- -- 4,471(3)
Stockholders Equity............................... 3,229 3,984 5,344 7,253 7,597 7,965 5,047
</TABLE>
- ------------------------
(1) Includes Suburban, which was acquired in February 1996.
(2) Includes a charge of $3.9 million relating to a Deferred Compensation Plan
enacted in 1996 as discussed in Footnote 8 to the Financial Statements.
(3) In May 1996, HealthFirst entered into a direct financing lease obligation
with a related party. In addition, HealthFirst assumed a capital lease
obligation with a related party as part of the Suburban acquisition. See
Footnote 8 in the Financial Statements.
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HEALTHFIRST MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
HealthFirst is a primary care based multi-specialty medical clinic founded
in 1909. In February 1996, Metropolitan merged with Suburban and changed its
name to HealthFirst. The merger has been accounted for as a purchase of Suburban
by Metropolitan in the financial statements.
As of June 30, 1996, HealthFirst consisted of 639 employees and 136
providers who offer a wide range of primary and specialty care services
including allergy, dermatology, family practice, gastroenterology,
hematology/oncology, infectious disease, internal medicine, pediatrics,
geriatrics, obstetrics/gynecology, podiatry, rheumatology and surgery.
HealthFirst operates clinics in 11 Portland-area locations including:
Tualatin, Tigard, Beaverton, Lake Oswego, Broadway, Northwest Portland,
Wilshire, Gateway, Gresham, Hollywood and Powell Valley.
Historically, the operations of the clinics have included both the provision
of medical services that will be provided by the New PCs and the management
aspects of the practice that will be carried on in the future by PPI. It was not
necessary to, nor did the clinics, segregate their operating results by these
categories. Accordingly, the results discussed below will not reflect the
results that might have occurred had those businesses been operated separately.
HealthFirst earns its revenues by providing services to patients under
Fee-For-Service and Prepaid arrangements summarized as follows:
Fee-For-Service: Patient service revenues are recorded in the period in
which services are provided at established rates. HealthFirst has agreements
with third-party payors that provide payments to HealthFirst at amounts
different from its established rates. The difference between the established
rates and related payments amounts are reflected as contractual discounts.
Prepaid: HealthFirst contracts with various HMOs to provide care to plan
enrollees at prepaid monthly fixed capitation rates on a per member basis.
Under a prepaid contract, HealthFirst assumes the obligation of providing
all contractually defined health care services to enrollees and is obligated
to reimburse outside providers for services rendered to enrollees.
HealthFirst has entered into discounted fee-for-service and subcapitation
agreements with these outside providers. Additional limitation of risk is
provided by the payment of stop loss reinsurance premiums. In addition, the
prepaid contracts contain minimum threshold reimbursement levels which limit
the downside risk.
The table below indicates the payor mix of the aggregate net clinic revenue
earned by the physician groups:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PAYOR JUNE 30, 1996
- ------------------------------------------------------------------------------------- -----------------
<S> <C>
Fee-For-Service:
Commercial and Private............................................................. 48.2%
Medicare........................................................................... 3.7%
Medicaid........................................................................... 1.0%
Prepaid (1).......................................................................... 47.1%
-------
100.0%
-------
-------
</TABLE>
- ------------------------
(1) Includes Commercial, Medicare and Medicaid prepaid programs.
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<PAGE>
The table below summarizes certain operating statistics at the end of the
periods noted:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
------------------------------- ----------------------
1993 1994 1995 1995 1996 (1)
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Physicians........................................... 56 66 93 71 122
Other Providers...................................... 4 6 12 10 14
Employees............................................ 240 395 555 443 639
Capitated Lives...................................... 16,431 20,186 23,661 22,058 44,268
Clinical Sites....................................... 5 6 7 6 11
</TABLE>
- ------------------------
(1) Includes Suburban, which was acquired in February 1996.
The table below sets forth the percentages of Net Revenue Less Provider
Compensation and Benefits represented by certain items reflected in
HealthFirst's Consolidated Statements of Operations. The information that
follows should be read in conjunction with the Consolidated Financial Statements
and notes thereto contained elsewhere.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE SIX MONTHS
ENDED DECEMBER 31 ENDED JUNE 30
---------------------------------- ----------------------
1993 1994 1995 1995 1996 (1)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Revenue Less Provider Compensation and
Benefits............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Clinic Salaries and Wages, Benefits.................. 34.6% 36.0% 41.7% 38.0% 47.6%
Purchased Medical Services........................... 17.4% 14.8% 15.1% 14.3% 25.4%
Medical and Office Supplies.......................... 12.4% 12.9% 15.6% 13.6% 16.4%
General and Administrative........................... 13.6% 13.4% 16.0% 15.1% 20.7%
Lease and Rent Expense............................... 3.4% 2.7% 3.0% 3.2% 5.1%
Provision for Uncollectible Accounts................. 3.8% 3.9% 4.1% 4.6% 4.5%
Depreciation and Amortization........................ 2.8% 2.7% 2.6% 2.7% 4.7%
---------- ---------- ---------- ---------- ----------
Total Operating Expenses............................. 88.0% 86.4% 98.1% 91.5% 124.4%
Operating Income (Loss).............................. 12.0% 13.6% 1.9% 8.5% (24.4%)
Interest Income...................................... 0.6% 0.4% 0.2% 0.1% 0.3%
Interest Expense..................................... 1.0% 0.8% 0.7% 0.9% 2.6%
Other Income (Expense)............................... 0.6% 0.8% 0.4% 0.3% 2.8%
---------- ---------- ---------- ---------- ----------
Income (Loss) Before Taxes........................... 12.2% 14.0% 1.8% 8.0% (23.9%)
Income Tax Expense (Benefit)......................... 4.9% 5.9% 0.7% 3.2% (8.3%)
---------- ---------- ---------- ---------- ----------
Net Income (Loss) (2)................................ 7.3% 8.1% 1.0% 4.8% (15.6%)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Includes Suburban, which was acquired in February 1996.
(2) Includes a charge of $3.9 million relating to a Deferred Compensation Plan
enacted in 1996 as discussed in Footnote 8 to the Financial Statements.
RESULTS OF OPERATIONS
The results of operations have been segregated between medical and
management services.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
MEDICAL SERVICES
Net revenues from providing Medical Services and related Provider
Compensation and Benefits comprise this aspect of the business.
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<PAGE>
NET REVENUES
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as follows.
FEE-FOR-SERVICE, NET. Fee-for Service, net increased from $10.8 million
for the six months ended June 30, 1995 to $15.2 million for the six
months ended June 30, 1996, an increase of $4.4 million
or 40.7%. This was primarily due to the purchase of Suburban in February
1996 and the addition of new providers in the last six months of 1995.
PREPAID HEALTH CARE. Prepaid Health Care increased from $7.2 million for
the six months ended June 30, 1995 to $13.5 million for the six months
ended June 30, 1996, an increase of $6.3 million or 87.5%. This increase
correlates with an increase of 100.7% in capitated lives by the end of
the period.
PROVIDER COMPENSATION AND BENEFITS. Historically, Provider Compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by HealthFirst were
based upon arbitrary and subjective decisions made by HealthFirst's Board of
Directors. Amounts of Provider Compensation distributed between providers
were based on mixtures of productivity and salary based formulas taking into
consideration historical and projected provider productivity. Provider
Compensation and Benefits increased from $4.7 million for the six months
ended June 30, 1995 to $12.4 million for the six months ended June 30, 1996,
an increase of $7.7 million or 165%. This increase was the result of a
charge of $3.9 million related to a bonus compensation plan that was
established in February 1996. The Plan establishes a fixed amount to be paid
to each participant. The benefit is fully vested after five years of
employment and is to be paid over a future period of eight years. The
present value of amounts to be paid is being accrued over the vesting
period. A substantial portion of the participants were fully vested as of
June 30, 1996. The increase in Provider Compensation and Benefits is also
the result of the increase in the number of providers due to the merger with
Suburban.
The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. Although the
impact can not be determined at this time, the amount available for Provider
Compensation and Benefits may also be effected by merger synergies and
management's ability to reduce costs or enhance revenues.
MANAGEMENT SERVICES
The historical operating expenses of HealthFirst represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and Benefits
which includes the salaries, wages and benefits of all non-provider
personnel, increased from $5.0 million for the six months ended June 30,
1995 to $7.7 million for the six months ended June 30, 1996, an increase of
$2.7 million or 54.0%. The increase resulted from the additional staff
needed to support providers added through the last six months of 1995 and
due to the staff added from the purchase of Suburban. Clinic Salaries, Wages
and Benefits, as a percentage of Net Revenues Less Provider Compensation and
Benefits adjusted for the non-recurring expense of $3.9 million relating to
Provider Deferred Compensation, increased from 38.0% for the six months
ended June 30, 1995 to 38.4% for the six months ended June 30, 1996.
PURCHASED MEDICAL SERVICES. Purchased Medical Services which include
professional and diagnostic services performed by third parties increased
from $1.9 million for the six months ended June 30, 1995 to $4.1 million for
the six months ended June 30, 1996, an increase of $2.2 million or 115.8%.
Purchased Medical Services as a percentage of Net Revenues Less Provider
Compensation and
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Benefits adjusted for the non-recurring expense of $3.9 million relating to
Provider Deferred Compensation, increased from 14.3% for the six months
ended June 30, 1995 to 25.4% for the six months ended June 30, 1996. The
increase is due to the 100.7% increase in capitated lives which is primarily
attributable to the purchase of Suburban in February 1996 and the addition
of providers in the last six months of 1995.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies, which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $1.8 million for the six months ended June 30, 1995 to $2.7
million for the six months ended June 30, 1996, an increase of $900,000 or
50.0%. Medical and Office Supplies, as a percentage of Net Revenues Less
Provider Compensation and Benefits adjusted for the non-recurring expense of
$3.9 million relating to Provider Deferred Compensation, decreased from
13.6% for the six months ended June 30, 1995 to 13.2% for the six months
ended June 30, 1996. The increase in supplies expenses results from the
additional use of internally provided services resulting from the purchase
of Suburban in February 1996 and the addition of other providers in the last
six months of 1995.
GENERAL AND ADMINISTRATIVE. General and Administrative expenses increased
from $2.0 million for the six months ended June 30, 1995 to $3.4 million for
the six months ended June 30, 1996, an increase of $1.4 million or 70.0%.
General and Administrative expenses, as a percentage of Net Revenues less
Provider Compensation and Benefits adjusted for the non-recurring expense of
$3.9 million relating to Provider Deferred Compensation, increased from
15.1% for the six months ended June 30, 1995 to 17.7% for the six months
ended June 30, 1996. This increase was the result of professional and
promotional fees relating to the purchase of Suburban and a concurrent
change in the corporation's name to HealthFirst, in addition to the
recruiting costs for new providers in 1996.
LEASE AND RENT EXPENSE. Lease and Rent Expense increased from $431,000 for
the six months ended June 30, 1995 to $831,000 for the six months ended June
30, 1996, an increase of $400,000 or 92.8%. Lease and Rent Expense, as a
percentage of Net Revenues Less Provider Compensation and Benefits adjusted
for the non-recurring expense of $3.9 million relating to Provider Deferred
Compensation, increased from 3.2% for the six months ended June 30, 1995 to
6.7% for the six months ended June 30, 1996. The increase was the result of
increasing leased square footage from 103,000 to 178,000, an increase of
74%, for the periods ended June 30, 1995 and 1996, respectively.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for Uncollectible Accounts
increased from $617,000 for the six months ended June 30, 1995 to $732,000
for the six months ended June 30, 1996, an increase of $115,000 or 18.6%. As
a percentage of Net Revenues Less Provider Compensation and Benefits,
Provision for Uncollectible Accounts remained relatively stable. The
Provision for Uncollectible Accounts primarily relates to the ability to
collect for services provided to private parties. The increase relates to
the purchase of Suburban.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization increased from
$366,000 for the six months ended June 30, 1995 to $768,000 for the six
months ended June 30, 1996, an increase of $402,000 or 109.8%. Depreciation
and Amortization expense as a percentage of Net Revenues Less Provider
Compensation and Benefits, adjusted for the non-recurring expense of $3.9
million relating to Provider Deferred Compensation, increased from 2.7% for
the six months ended June 30, 1995 to 6.2% for the six months ended June 30,
1996. The increase relates to the purchase of Suburban, the completion of
the construction of a new clinic building and equipment to support the
addition of new providers.
OTHER NON-OPERATING INCOME. Other Non-Operating Income increased from
$55,000 for the six months ended June 30, 1995 to $453,000 for the six
months ended June 30, 1996, an increase of $398,000 or 723.6%. This increase
was primarily the result of subleasing office space in 1996 and other income
received from the Northwest Physician Alliance.
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INTEREST EXPENSE. Interest Expense increased from $121,000 for the six
months ended June 30, 1995 to $429,000 for the six months ended June 30,
1996, an increase of $308,000 or 254.5%. This increase was the result of
additional debt related to the new Tualatin Clinic Building and equipment.
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
MEDICAL SERVICES
Net revenues from providing Medical Services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as follows.
FEE-FOR-SERVICE, NET. Fee-for-Service, net increased from $18.8 million
for the 12 months ended December 31, 1994 to $22.8 million for the 12
months ended December 31, 1995, an increase of $4.0 million or 21.3%.
This increase correlates with a increase in providers during the last six
months of 1995.
PREPAID HEALTH CARE. Prepaid Health Care increased from $13.5 million
for the 12 months ended December 31, 1994 to $14.8 million for the 12
months ended December 31, 1995, an increase of $1.3 million or 9.6%. This
increase is a result of an increase in the number of member lives during
the period.
PROVIDER COMPENSATION AND BENEFITS. Historically, Provider Compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by the clinic were based
upon arbitrary and subjective decisions made by HealthFirst's Board of
Directors. Amounts of Provider Compensation distributed between providers
were based on mixtures of productivity and salary based formulas taking into
consideration historical and projected provider productivity. Provider
Compensation and Benefits increased from $8.4 million for the year ended
December 31, 1994 to $9.5 million for the year ended December 31, 1995, an
increase of $1.1 million or 13%. This increase was the result of additional
providers that were recruited during 1995.
The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. Although the
impact can not be determined at this time, the amount available for Provider
Compensation and Benefits may also be effected by merger synergies and
management's abiity to reduce costs or enhance revenues.
MANAGEMENT SERVICES
The historical operating expenses of HealthFirst represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and Benefits
which include the salaries, wages and benefits of all non-provider
personnel, increased from $8.6 million for the 12 months ended December 31,
1994 to $11.7 million for the 12 months ended December 31, 1995, an increase
of $3.1 million of 36.0%. Clinic Salaries, Wages and Benefits, as a
percentage of Net Revenue less Provider Compensation and Benefits, increased
from 36.0% to 41.7% for the 12 months ended December 31, 1994 and 1995,
respectively. The increase resulted from additional employees hired to
support the 45.8% increase in providers.
PURCHASED MEDICAL SERVICES. Purchased Medical Services increased from $3.5
million for the 12 months ended December 31, 1994 to $4.3 million for the 12
months ended December 31, 1995, an
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increase of $800,000 or 22.9%. The increase is due to the 17.2% increase in
capitated lives and an increased use of externally provided managed care
services by existing members.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies, which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $3.1 million for the 12 months ended December 31, 1994 to
$4.4 million for the 12 months ended December 31, 1995, an increase of $1.3
million or 41.9%. Medical and Office Supplies, as a percentage of Net
Revenues less Provider Compensation and Benefits, increased from 12.9% to
15.6% for the 12 months ended December 31, 1994 and 1995, respectively, as a
result of setting up new provider practices in 1995.
GENERAL AND ADMINISTRATIVE. General and Administrative increased from $3.2
million for the 12 months ended December 31, 1994 to $4.5 million for the 12
months ended December 31, 1995, an increase of $1.3 million or 40.6%.
General and Administrative, as a percentage of Net Revenues Less Provider
Compensation and Benefits, increased from 13.4% to 16.0% for the 12 months
ended December 31, 1994 and 1995, respectively. The increase is due to the
additional costs incurred to add providers during the last six months of
1995.
LEASE AND RENT EXPENSE. Lease and Rent Expense increased from $655,000 for
the 12 months ended December 31, 1994 to $853,000 for the 12 months ended
December 31, 1995, an increase of $198,000 or 30.2%. The increase is due
primarily to the addition of an Immediate Care Clinic facility and the
assumption of new leases associated with the addition of new providers in
July 1995.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for Uncollectible Accounts
increased from $936,000 for the 12 months ended December 31, 1994 to $1.1
million for the 12 months ended December 31, 1995, an increase of $164,000
or 17.5%. This increase correlates to the increase in accounts receivable
offset by a reduction in the proportion due from private parties.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization increased from
$637,000 for the 12 months ended December 31, 1994 to $736,000 for the 12
months ended December 31, 1995, an increase of $99,000 or 15.5%. The
increase is due to the purchase of furniture and equipment for the new
Tualatin facility, and other leasehold improvements.
TWELVE MONTHS ENDED DECEMBER 31, 1994 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1993
MEDICAL SERVICES
Net revenues from providing Medical Services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES
Net revenues consist of revenues received from Fee-for-Services and Prepaid
Health Care activities as follows.
FEE-FOR-SERVICE, NET. Fee-for-Service, net increased from $13.5 million
for the 12 months ended December 31, 1993 to $18.8 million for the 12
months ended December 31, 1994, an increase of $5.3 million or 39.3%. The
increase is due to a new clinic location serving primarily fee-for-
service patients and new providers at existing clinics.
PREPAID HEALTH CARE. Prepaid Health Care increased from $10.9 million
for the 12 months ended December 31, 1993 to $13.5 million for the 12
months ended December 31, 1994, an increase of $2.6 million or 23.9%.
This increase correlates with a 22.9% increase in the number of capitated
lives by the end of the period.
PROVIDER COMPENSATION AND BENEFITS. Historically, Provider Compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by the clinic were based
upon arbitrary and subjective decisions made by the HealthFirst's Board of
Directors. Amounts of Provider Compensation distributed between providers
were based on mixtures
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of productivity and salary based formulas taking into consideration
historical and projected provider productivity. Provider Compensation and
Benefits increased from $6.3 million for the year ended December 31, 1993 to
$8.4 million for the year ended December 31, 1994, an increase of $2.1
million or 33.3%. This increase was the result of the addition of providers
to support the new clinic location that was established in 1994 and the
addition of new providers at existing sites.
The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. Although the
impact can not be determined at this time, the amount available for Provider
Compensation and Benefits may also be effected by merger synergies and
management's ability to reduce costs or enhance revenues.
MANAGEMENT SERVICES
The historical operating expenses of HealthFirst represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and Benefits
which include the salaries, wages and benefits of all non-provider
personnel, increased from $6.3 million for the 12 months ended December 31,
1993 to $8.6 million for the 12 months ended December 31, 1994, an increase
of $2.3 million or 36.5%. The increase is due to employees hired to support
the increase in providers.
PURCHASED MEDICAL SERVICES. Purchased Medical Services increased from $3.2
million for the 12 months ended December 31, 1993 to $3.5 million for the 12
months ended December 31, 1994, an increase of $300,000 or 9.4%. The
increase is due to a 22.9% increase in capitated lives by the end of the
period which was offset by lower use of externally provided managed care
services by existing members.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies, which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $2.2 million for the 12 months ended December 31, 1993 to
$3.1 million for the 12 months ended December 31, 1994, an increase of
$900,000 or 40.9%. The increase is related to a 23.9% increase in office
visits and an increase in drug therapy for oncology patients.
GENERAL AND ADMINISTRATIVE. General and Administrative expenses increased
from $2.5 million for the 12 months ended December 31, 1993 to $3.2 million
for the 12 months ended December 31, 1994, an increase of $700,000 or 28.0%.
This increase correlates to an increase in providers.
LEASE AND RENT EXPENSE. Lease and Rent Expense increased from $608,000 for
the 12 months ended December 31, 1993 to $655,000 for the 12 months ended
December 31, 1995, an increase of $47,000 or 7.7%. The increase is primarily
due to the assumption of a new lease from the addition of Tualatin Medical
Center in January 1994.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for Uncollectible Accounts
increased from $696,000 for the 12 months ended December 31, 1993 to
$936,000 for the 12 months ended December 31, 1994, an increase of $240,000
or 34.5%. This increase correlates to an increase in accounts receivable.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization increased from
$510,000 for the 12 months ended December 31, 1993 to $637,000 for the 12
months ended December 31, 1994, an increase of $127,000 or 24.9%. This
relates to the equipment purchased to support new providers.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. At June 30, 1996, HealthFirst had a working capital
deficit of $2.5 million, compared to a $1.5 million deficit at December 31,
1995. The change is mainly due to the additional borrowings of $1.1 million
related to the construction of the Tualatin facility. At June 30, 1996, net
patient accounts receivable of $5.9 million amounted to 71 days of net revenue
compared to $4.4 million and 70 days at the end of the prior year. As a result
of the Merger, PPI will assume the financing activities relating
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to the working capital needs of HealthFirst. See "PPI Management's Discussion
and Analysis of Financial Condition and Results of Operations".
CAPITAL EXPENDITURES. Capital expenditures during the first six months of
1996 required $1.7 million. Expenditures are related to the purchase of
furniture and medical equipment for the newly constructed Tualatin Facility and
leased Tigard Facility. PPI and HealthFirst will negotiate and agree upon the
annual capital budget and the related terms of providing the needed financing as
part of the activities of the Joint Management Board. See "PPI Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Operation, Management and Business of PPI Following the Merger--Practice
Management Agreement."
FINANCING ACTIVITIES. In May 1996, HealthFirst negotiated a new $2.5
million Line of Credit with U.S. National Bank of Oregon, replacing the previous
$1.0 million line. The Line of Credit is secured by substantially all of the
assets of HealthFirst. PPI will seek to combine HealthFirst's short-term line of
credit into a consolidated PPI line of credit. See "PPI Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Financing activities generated $1.6 million for the six months ended June
30, 1996 as a result of $1.1 million in proceeds from the construction loan for
the Tualatin facility. In addition, HealthFirst received $1 million from
HealthFirst Properties, LLC as consideration of the new direct financing lease
obligation of HealthFirst's clinic facilities. In July 1995, a Construction Note
of $3.75 million with interest only payments for 18 months with U.S. National
Bank of Oregon, was activated for the purpose of partially funding the building
of a new Tualatin Medical Clinic facility. In December 1995, a three year note
of $500,000 with U.S. National Bank of Oregon was created for the purchase of
furnishings and equipment for the Tualatin facility. Also in December 1995, a 15
year mortgage on the Broadway Medical Clinic was created with U.S. National Bank
of Oregon to provide the remaining capital needed for the new Tualatin facility.
HealthFirst intends on converting the short-term construction loan to a
mortgage.
HealthFirst believes that the combination of funds available under lines of
credit and debt agreements in place, together with cash reserves and cash flow
from operations, should be sufficient to meet the working capital needs.
HealthFirst recognizes that in order to finance the continued long-term growth
of the organization it needs to increase its ability to access capital. See "The
Merger and Related Transactions--HealthFirst's Reasons for the Merger."
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BUSINESS OF CORVALLIS CLINIC
GENERAL
Corvallis Clinic is a multi-specialty medical group which emphasizes
internal medicine and family medicine. It originally was founded in 1947 in
downtown Corvallis, Oregon but relocated to its current site, near Good
Samaritan Hospital Corvallis, in 1978. Corvallis Clinic maintains a strong
presence in the Corvallis, Oregon community with over 75 full-time and two
part-time physician employees.
Over the past five years, Corvallis Clinic has seen a growth in capitated
payment plans and has therefore concentrated on building alliances to serve its
capitated patients. Since 1991, Corvallis Clinic has made a concerted effort to
expand its primary care base and obtain the services of additional primary care
physicians. In 1993 Corvallis Clinic expanded by acquiring three medical groups
in the region--Albany Family Medicine, Corvallis Clinic Family Medicine and
Philomath Family Medicine. Since the three acquisitions, a total of 10
additional new primary care physicians have been recruited. The 1993 expansion
gave Corvallis Clinic access to the HMO Oregon Health Plan which significantly
increased Corvallis Clinic's patient base.
Under capitated contracts, Corvallis Clinic is paid a fixed fee per covered
life on a monthly basis throughout the contract period. Corvallis Clinic
provides services on a capitated basis to PacifiCare and SelectCare patients,
including patients that have Medicare coverage through these programs. Corvallis
Clinic is also at risk for HMO Oregon patients and patients enrolled in the
Oregon Health Plan. In addition, Corvallis Clinic has fee arrangements with
several outside providers based on fee schedules or a specified percentage of
ordinary and customary charges, including certain PPOs and certain employers.
While Corvallis Clinic obtains a substantial and growing portion of its
revenues from managed care programs, it continues to conduct more traditional
forms of business. Corvallis Clinic is a Medicare provider and it also receives
fee-for-service payments from a significant percentage of patients and
traditional indemnity insurers.
In 1995, $18,469,738 (or approximately 47%) of Corvallis Clinic net patient
revenues came from capitated (prepaid) arrangements; $20,704,589 (or
approximately 53%) derived from PPOs, other contractual relationships,
individuals or private insurance carriers (fee-for-service). In 1994,
$15,798,726 (or approximately 45%) of Corvallis Clinic net patient revenues came
from prepaid arrangements; $19,545,575 (or approximately 55%) derived from
fee-for-service work.
Corvallis Clinic is actively involved in the process of becoming accredited
through MQC under the auspices of American Medical Group Association ("AMGA").
Corvallis Clinic's Accreditation Plan was implemented in January of 1996. Site
review and completion is scheduled for April of 1997. Corvallis Clinic feels
that the accreditation certification will greatly enhance its reputation as a
premier provider of medical services.
In addition to receiving income from its primary business as a health care
provider, Corvallis Clinic participates in two joint ventures. Corvallis Clinic
is a 50% owner of a limited liability company of which Good Samaritan Hospital
Corvallis is the other owner. This limited liability company, HealthCare
Partners, LLC ("HealthCare Partners") owns five buildings in which Corvallis
Clinic leases space. In addition, Corvallis Clinic is one of three equal
partners, together with Corvallis Radiology, P.C. and Samaritan Enterprises (a
corporate affiliate of Good Samaritan Hospital Corvallis) in the Corvallis MRI
Joint Venture ("Corvallis MRI"), an entity which renders magnetic resonance
imaging services.
The Corvallis Clinic Foundation is a non-profit Section 501(c)(3)
corporation formed by Corvallis Clinic in 1954, and of which Corvallis Clinic is
the sole member. Such foundation sponsors an ongoing scholarship program at
local high schools, community college and Oregon State University.
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BUSINESS STRATEGY
During the past five years, Corvallis Clinic's strategy involved increasing
its geographic service area to strengthen its position as a managed care
provider. In 1992, Corvallis Clinic had an exclusive relationship to serve
PacifiCare patients in Corvallis, Oregon and the surrounding areas. Noting the
growth of managed care generally and the increasing reliance on one HMO for
Corvallis Clinic capitation, Corvallis Clinic management decided to forego its
exclusive arrangement with PacifiCare and to diversify into three major health
plans. Corvallis Clinic chose to retain its contract with PacifiCare (on a
nonexclusive basis), and added Select Care and HMO Oregon.
In 1995, Corvallis Clinic entered into a regional alliance with three local
PHOs through a corporation called HealthQuest, Inc. In 1996, Corvallis Clinic
continued to use the provider arrangements the regional alliance developed but
commenced procedures to enable it to withdraw from the alliance. Corvallis
Clinic management determined that its attractiveness and leverage with the major
health plans would increase if it affiliated with entities outside the region of
Corvallis, Oregon. Consequently, Corvallis Clinic has sought its current
partners for the Merger described herein. See "Corvallis Clinic's Reasons for
the Corvallis Clinic's Reorganization Transactions and the Merger."
Aside from the business combination with the other Companies, the current
business strategy of Corvallis Clinic involves cost reduction and control to
serve capitated patients more efficiently. While Corvallis Clinic will continue
to consider affiliations or combinations with primary care providers in the
greater Corvallis area in 1996 and 1997, it will be most likely to pursue
acquisitions of physicians or groups that already have a full complement of
patients. Corvallis Clinic is in the process of formulating a patient quality
customer satisfaction program that will be rolled out in 1997.
GOVERNMENT REGULATION
Corvallis Clinic is subject to federal and state laws regulating the
relationships among providers of health care services, physicians and other
clinicians. These laws include the fraud and abuse provisions of the Medicare
and Medicaid statutes, which prohibit the solicitation, payment, receipt or
offering of any direct or indirect remuneration for the referral of Medicare or
Medicaid patients or for the recommending, leasing, arranging, ordering or
purchasing of Medicare or Medicaid covered services. Other laws impose
significant penalties for false or improper billings for physician services and
impose restrictions on physician referrals for designated health services
reimbursable under the Medicare or Medicaid programs to entities with which they
have financial relationships. See "Physician Practice Management Industry--
Government Regulation". There can be no assurance that Corvallis Clinic's
present or past operations will not be subjected to scrutiny or legal
challenges.
SERVICES PROVIDED
Specialties offered by Corvallis Clinic include:
<TABLE>
<S> <C>
Allergy Neurology
Behavioral Health Obstetrics
Cardiology Occupational Medicine
Critical Care Oncology
Dermatology Ophthalmology
Endocrinology Optometry
Family Practice Orthopedics
Gastroenterology Otolaryngology
Gynecology Pediatrics
Hematology Podiatry
Immunology Rheumatology
Infectious Disease Surgery--General and Vascular
Internal Medicine Urgent Care
Nephrology Urology
</TABLE>
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Corvallis Clinic has numerous provider arrangements in the community so that
it can offer additional services to patients covered under capitated contracts.
In addition to medical services, Corvallis Clinic offers a number of ancillary
services within its offices, including Cardiopulmonary and Clinical
Laboratories, Physical Therapy and Radiology Facilities, an Optical Dispensary
and a Pharmacy.
ENROLLEES OF AT-RISK HEALTH PLANS UNDER CONTRACT WITH
CORVALLIS CLINIC
(AS OF JUNE 30, 1996)
<TABLE>
<CAPTION>
ENROLLED % OF TOTAL
----------- -----------
<S> <C> <C>
Commercial.............................................................. 27,919 77.1
Medicaid................................................................ 4,095 11.3
Medicare................................................................ 4,188 11.6
----------- -----------
TOTAL................................................................... 36,202 100.0%
----------- -----------
----------- -----------
</TABLE>
MARKETING AND DEVELOPMENT
Corvallis Clinic actively seeks managed care contracts and enters into
contracts with regional employers in cases where it determines the volume of
patients and reimbursements it will obtain will allow for the cost-effective
provision of medical services. Because Corvallis Clinic is well known in the
communities in which it is based, it has not performed extensive local
marketing. Much of its business development is based upon relationships between
its physicians and the community at large. Several Corvallis Clinic physicians
hold leadership positions in the community. In addition, Corvallis Clinic
directly supports local youth and non-profit programs.
COMPETITION
The health care industry is highly competitive. The industry is also subject
to continuing changes in the services that are provided and how providers are
selected and paid. In the Corvallis market, Corvallis Clinic is the largest
physician-owned multi-specialty group in its service area. Corvallis Clinic's
main competition comes from three PHOs located in Corvallis, Albany and Lebanon,
Oregon. In addition, a multi-specialty IPA known as Quality Care Associates
competes with Corvallis Clinic's specialists in specialties such as orthopedics,
ophthalmology, surgery and dermology. At present, there is a significant
presence of PPMs in the Corvallis Clinic service area.
EMPLOYEES
PROVIDER EMPLOYEES.
As of November 1, 1996, Corvallis Clinic had 75 full-time and two part-time
physician employees. New Corvallis Clinic physicians initially sign one-year
associate employment contracts. These contracts offer a specified guaranteed
salary and an incentive bonus. Physicians are also eligible to receive benefits
such as health, dental, life and professional liability insurance, paid time off
and an allowance for continuing medical education and other professional
expenses. At the end of the associate year, the physician becomes eligible to
become a shareholder. A rigorous peer review is completed prior to the offering
of shareholder status. The transition must be approved by both the individual
physician and a two-thirds vote of the shareholders.
Certain other Corvallis Clinic provider employees, including psychologists
and podiatrists, are eligible for shareholder status on terms similar to those
of physicians. In addition, Corvallis Clinic employs four nurse practitioners,
two physician assistants and one optometrist.
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NON-PROVIDER EMPLOYEES.
As of November 1, 1996, Corvallis Clinic had approximately 388 full-time and
135 part-time non-provider employees. None of Corvallis Clinic's employees are
represented by a labor union. Management believes its employee relations to be
satisfactory.
Corvallis Clinic has invested heavily in its managed care functions. It
currently has a staff of 18 full-time employees and handles a full range of
services including enrollment data, customer service, vendor contracting, claims
adjudication, and claims payment.
INSURANCE
Corvallis Clinic carries workers' compensation insurance and maintains
multiperil liability, fiduciary liability, employee dishonesty, professional
liability, general liability and directors and officers' insurance with coverage
limits ranging from $500,000 to $27.0 million.
The business of Corvallis Clinic entails an inherent risk of claims of
provider professional liability. To protect its overall operations from such
potential liabilities, Corvallis Clinic maintains professional liability
insurance and general liability insurance on a claims-made basis. The current
policy provides coverage of $5 million per occurrence, with no aggregate maximum
limit for claims made against Corvallis Clinic and its employees. Accruals for
outstanding claims and associated deductibles are made in the period in which
the event becomes known. Management does not believe professional liability
exposure is significant; however, there can be no assurance that a future claim
will not exceed the limits of available insurance coverage or that such coverage
will continue to be available.
PROPERTIES AND FACILITIES
The main offices of Corvallis Clinic are two buildings located near one
another in Corvallis, Oregon. The Asbury Building, which was named after one of
the founding physicians of the clinic, consists of over 80,000 square feet of
medical office space. It houses the Immediate Care Center which is open 365 days
a year and the majority of Corvallis Clinic's primary care and specialty
physicians. The Aumann Building is located adjacent to the Asbury building and
consists of over 40,000 square feet with some medical offices as well as the
administrative offices. The Asbury and Aumann Buildings are located adjacent to
a medical campus on which Good Samaritan Hospital Corvallis, Good Samaritan's
Radiation Oncology Center, and the Samaritan Medical Group are located.
Corvallis Clinic also maintains an office dedicated to research in Corvallis,
Oregon.
Corvallis Clinic maintains three geographically dispersed satellite offices.
Corvallis Family Medicine supports the practice of five family practice
physicians and one nurse practitioner. Philomath Family Medicine supports the
practice of four family practice physicians. Albany Family Medicine supports the
practice of six family practice physicians. Corvallis Clinic has the option to
contract for additional space in the Albany facility that would also support six
physicians.
Corvallis Clinic has an Occupational Medicine Facility located in Corvallis.
It is a full service Occupational Medicine Department which is open five days a
week. Other than a short-term lease agreement with Pacific Communities Hospital
in Newport, Oregon where Corvallis Clinic provides an oncologist two days per
week, all Corvallis Clinic facilities are leased through HealthCare Partners.
The ownership and control of HealthCare Partners are shared equally between
Corvallis Clinic and Good Samaritan Hospital Corvallis. Decisions regarding the
business of HealthCare Partners require an agreement of both members. Pursuant
to the Merger, the interest of Corvallis Clinic in HealthCare Partners will be
transferred to PPI.
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INFORMATION SYSTEMS
Corvallis Clinic has invested significantly in capital equipment and in
information technologies. In the past, Corvallis Clinic has typically purchased
equipment directly rather than leasing it. Information technologies have been an
important component of the capital investments of Corvallis Clinic. Corvallis
Clinic uses a network of desktop computers with additional stand-alone computers
that are dedicated to specific tasks. Corvallis Clinic has purchased or licensed
appropriate software for these computers. Computer software significant to
Corvallis Clinic includes CyCare for patient billing and scheduling, SoftMed for
chart tracking and transcription, Kronos for payroll, Clarion for claims
payment, and ANSOS for physician and nurse scheduling. The laboratory, radiology
and accounting departments also use specialized computer software. The hardware
that the Corvallis Clinic utilizes for its main information system was converted
to the Hewlett-Packard 9000 in 1995, giving the information system network
significant additional capacity and speed.
LEGAL PROCEEDINGS
Corvallis Clinic is engaged in the defense of lawsuits arising in the
ordinary course and conduct of its business. Corvallis Clinic believes that such
actions will not have a material adverse effect on its business.
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DESCRIPTION OF CAPITAL STOCK OF CORVALLIS CLINIC
Corvallis Clinic is owned by 63 holders of Corvallis Clinic Class A Stock,
75 holders of Corvallis Clinic Class B Stock and 55 holders of Corvallis Clinic
Class C Stock. Most shareholders hold shares of all three classes of capital
stock of Corvallis Clinic. As of November 1, 1996, shares of Corvallis Clinic
Class A Stock were held by 59 practicing Corvallis Clinic shareholder
physicians, three psychologists and one podiatrist. In addition, 13 retired or
departed Corvallis Clinic physicians hold shares of Corvallis Clinic Class B
Stock.
Under the Corvallis Clinic Articles of Incorporation, the shares of
Corvallis Clinic Class A Stock have voting rights on all matters to be voted on
by the shareholders of Corvallis Clinic other than matters expressly reserved to
the holders of Class B Stock. Approval by two-thirds of the holders of Corvallis
Clinic Class A Stock is required on matters on which they vote. The only voting
right expressly reserved to holders of Corvallis Clinic Class B Stock is a right
to vote with respect to the election of certain members of an "LLC Committee"
and each member of a "Restricted Fund Committee" (advisory committees to the
Corvallis Clinic Board regarding, respectively, management of HealthCare
Partners, LLC and the investment of certain funds including amounts distributed
by HealthCare Partners, LLC to Corvallis Clinic). Holders of Corvallis Clinic
Class B Stock have additional limited voting rights so that the approval by two-
thirds of the outstanding shares of each of Corvallis Clinic Class A Stock and
Corvallis Clinic Class B Stock is required on certain matters. These matters
include certain amendments to the Articles of Incorporation and amendments to
provisions in the Bylaws regarding the LLC Committee and the Restricted Fund
Committee. Holders of Corvallis Clinic Class B Stock are not entitled to vote
separately regarding a merger. Shares of Corvallis Clinic Class C Stock are
non-voting and convey additional equity in Corvallis Clinic.
Corvallis Clinic equity is not traded on an established public market.
Transfer of the shares of capital stock of Corvallis Clinic is currently
restricted by the terms of a Restrictive Stock Agreement dated February 26,
1990, as amended March 14, 1994. Pursuant to this Restrictive Stock Agreement
and the Articles of Incorporation, shares of Corvallis Clinic Class A Stock are
redeemable at $23,000 per share, shares of Corvallis Clinic Class B Stock are
redeemable at $595 per share and shares of Corvallis Clinic Class C Stock are
redeemable at $100 per share. Under the Articles of Incorporation, in the event
of any liquidation, dissolution or winding up of Corvallis Clinic, either
voluntary or involuntary, the assets of Corvallis Clinic will be distributed in
the following order of priority: (i) holders of Corvallis Clinic Class C Stock
shall be entitled to receive, pro rata based on the number of shares of
Corvallis Clinic Class C Stock held by each such holder, $100 per share, (ii)
holders of Corvallis Clinic Class A Stock shall be entitled to receive, pro rata
based on the ownership by each such holder of one share of Corvallis Clinic
Class A Stock, $23,000 per share and (iii) holders of Corvallis Clinic Class B
Stock shall be entitled to receive the remaining assets of Corvallis Clinic
legally available for distribution to shareholders, pro rata based on the number
of shares of Corvallis Clinic Class B Stock held by each such holder.
No persons are the beneficial owners of more than five percent of any class
of Corvallis Clinic shares. Cash dividends were not declared on the common
equity of Corvallis Clinic in the 1995 or 1994 fiscal years. All of the
outstanding Corvallis Clinic shares have been validly issued and are fully paid
and nonassessable. Other than the Corvallis Clinic Option Shares, there are no
outstanding options, warrants, subscriptions, conversions or other rights,
agreements or commitments obligating Corvallis Clinic to issue any additional
shares or any other securities convertible into, exchangeable for or evidencing
the right to subscribe for any Corvallis Clinic shares. There are no voting
trusts or other agreements or understandings to which Corvallis Clinic is a
party with respect to the voting of Corvallis Clinic shares.
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<PAGE>
SELECTED FINANCIAL DATA OF CORVALLIS CLINIC
The following table sets forth selected financial data which have been
derived from the financial statements as of and for the years ended November 30,
1991 through 1995. The Balance Sheets as of November 30, 1994 and 1995, and the
related Statements of Operations, Shareholders' Equity and Cash Flows for each
of the years ended November 30, 1993 through 1995 have been audited by Arthur
Andersen L.L.P. The financial statements as of and for the seven month periods
ended June 30, 1995 and 1996 have been derived from the unaudited financial
statements of Corvallis Clinic which, in the opinion of management, include all
adjustments (which consist of only normal, recurring adjustments) necessary for
a fair presentation of the information set forth therein. The following data
should be read in conjunction with "Corvallis Clinic Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere in this document.
<TABLE>
<CAPTION>
FOR THE SEVEN MONTHS
FOR THE YEAR ENDED NOVEMBER 30, ENDED JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Fee-For-Service, net.................................. $ 14,220 $ 15,262 $ 16,422 $ 19,545 $ 20,705 $ 9,450 $ 10,850
Prepaid Health Care, net.............................. 5,631 8,601 13,517 15,799 18,469 12,685 13,179
--------- --------- --------- --------- --------- --------- ---------
Total Net Revenues.................................... 19,851 23,863 29,939 35,344 39,174 22,135 24,029
Less Provider Compensation and Benefits............... (8,071) (8,094) (7,122) (13,729) (13,209) (7,559) (6,342)
--------- --------- --------- --------- --------- --------- ---------
Net Revenue Less Provider Compensation and Benefits... 11,780 15,769 22,817 21,615 25,965 14,576 17,687
OPERATING EXPENSES:
Clinic Salaries, Wages and Benefits................... 6,921 7,370 10,175 10,404 12,579 6,916 7,750
Purchased Medical Services............................ 1,252 2,096 2,656 3,081 4,717 2,997 3,696
Medical and Office Supplies........................... 1,314 2,610 3,014 3,327 3,843 1,975 2,587
General and Administrative............................ 2,155 2,136 2,436 3,157 3,560 1,627 1,723
Lease and Rent Expense................................ 173 177 177 178 198 135 66
Provision for Contractual Discounts and Uncollectible
Accounts............................................. 486 735 1,033 1,181 1,767 683 660
Depreciation and Amortization......................... 544 536 668 1,006 1,115 576 893
--------- --------- --------- --------- --------- --------- ---------
Total Operating Expenses.............................. 12,845 15,660 20,159 22,334 27,779 14,909 17,375
Operating Income (Loss)............................... (1,065) 109 2,658 (719) (1,814) (333) 312
Other Non-Operating (Income) Expenses................. (269) (233) 80 (166) (738) (156) (279)
Interest Income....................................... -- -- -- 56 192 165 26
Interest Expense...................................... 275 350 639 780 1,223 731 687
--------- --------- --------- --------- --------- --------- ---------
Income (Loss) Before Taxes............................ (1,071) (8) 1,939 (1,277) (2,107) (743) (70)
--------- --------- --------- --------- --------- --------- ---------
Income Tax Expense (Benefit).......................... (455) (32) 759 0 0 0 0
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss)..................................... (616) 24 1,180 (1,277) (2,107) (743) (70)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
AS OF NOVEMBER 30, AS OF JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficit)............................. 1,180 1,071 1,666 (296) (1,251) 1,192 (1,768)
Total Assets.......................................... 11,448 14,034 21,697 21,808 26,549 25,778 26,727
Long-Term Debt, net................................... 2,675 3,962 8,374 8,310 729 849 554
Capital and Direct Finance Lease Obligations, Net..... -- -- 245 155 14,258 14,593 14,098
Redeemable Stocks and Accumulated Deficit............. 3,091 3,409 5,251 4,329 2,316 3,430 2,022
</TABLE>
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<PAGE>
CORVALLIS CLINIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Corvallis Clinic is a primary care based multi-specialty medical clinic
founded in 1947. As of June 30, 1996, Corvallis Clinic consisted of 513
employees and 97 providers who offer a wide range of primary and specialty care.
In addition, Corvallis Clinic offers ancillary services such as physical
therapy, optical, pharmacy, laboratory and imaging.
The majority of Corvallis Clinic operations are located in two facilities in
Corvallis. In addition,
Corvallis Clinic operates four satellite offices: Albany Family Medicine,
Corvallis Family Medicine, Philomath Family Medicine and Research Park.
Historically, the operations of the clinics have included both the provision
of medical services that will be provided by the New PCs and the management
aspects of the practice that will be carried on in the future by PPI. As such,
it was not necessary to, nor did the clinics, segregate their operating results
by these categories. Accordingly, the results discussed below will not reflect
the results that might have occurred had those businesses been operated
separately.
The revenues are reported on a Fee-For-Service and Prepaid basis as follows:
FEE-FOR-SERVICE. Patient service revenues are recorded at
established rates in the period in which services are provided.
Corvallis Clinic has agreements with third-party payors that
provide payments to Corvallis Clinic at amounts different from its
established rates. The difference between the established rates
and the related payment amounts are reflected as contractual
discounts.
PREPAID. Corvallis Clinic contracts with various HMOs to provide
care to plan enrollees for prepaid monthly fixed capitation rates
on a per member basis. Under a prepaid contract, Corvallis Clinic
assumes the obligation of providing all contractually defined
health care services to enrollees and is obligated to reimburse
outside providers for services rendered to enrollees. Corvallis
Clinic has entered into discounted fee-for-service and
subcapitation agreements with many of these outside providers.
Additional limitation of risk is provided by the payment of stop
loss reinsurance premiums. In addition, prior to January 1, 1992,
Corvallis Clinic included minimum threshold reimbursement levels
in its Medicare-risk contracts; there are no longer such
provisions in any of Corvallis Clinic's prepaid contracts.
The following table indicates the payor mix of the aggregate net clinic
revenue earned by Corvallis Clinic:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
PAYOR JUNE 30, 1996
- ----------------------------------------------------------------------------------- ---------------------
<S> <C>
Fee-For-Service:
Commercial and Private........................................................... 40.6%
Medicare......................................................................... 4.1%
Medicaid......................................................................... 0.5%
Prepaid (5)........................................................................ 54.8%
-----
100%
-----
-----
</TABLE>
- ------------------------
(5) Includes enrollees under Commercial, Medicare and Medicaid programs.
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<PAGE>
The table below summarizes certain operating statistics at the end of the
periods noted:
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, AS OF JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Physicians....................................................... 74 73 84 74 85
Other Providers.................................................. 8 9 11 9 6
Employees........................................................ 392 469 526 482 513
Capitated Lives.................................................. 20,031 23,457 28,487 25,359 28,220
Clinical Sites................................................... 7 7 7 7 8
</TABLE>
The table below sets forth the percentages of net revenue less compensation
to providers represented by certain items reflected in Corvallis Clinic's
Statements of Income. The information that follows should be read in conjunction
with the Financial Statements and notes thereto contained elsewhere.
<TABLE>
<CAPTION>
FOR THE SEVEN MONTHS
FOR THE YEAR ENDED NOVEMBER 30, ENDED JUNE 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Revenue Less Provider Compensation and Benefits.... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Clinic Salaries, Wages and Benefits.................... 44.6% 48.1% 48.4% 47.4% 43.8%
Purchased Medical Services............................. 11.6% 14.2% 18.2% 20.6% 20.9%
Medical and Office Supplies............................ 13.2% 15.4% 14.8% 13.5% 14.6%
General and Administrative............................. 10.7% 14.6% 13.7% 11.2% 9.7%
Lease and Rent Expense................................. 0.8% 0.8% 0.8% 0.9% 0.4%
Provision for Uncollectible Accounts................... 4.5% 5.5% 6.8% 4.7% 3.7%
Depreciation and Amortization.......................... 2.9% 4.7% 4.3% 4.0% 5.1%
----- ----- ----- ----- -----
Total Operating Expenses............................... 88.3% 103.3% 107.0% 102.3% 98.2%
----- ----- ----- ----- -----
Operating Income (Loss)................................ 11.7% (3.3%) (7.0%) (2.3%) 1.8%
Other Non-Operating (Income) Expense................... (0.3%) (0.8%) 2.8% (1.1%) (1.6%)
Interest Income........................................ 0.0% 0.2% 0.7% 1.1% 0.1%
Interest Expense....................................... 2.8% 3.6% 4.7% 5.0% 3.9%
----- ----- ----- ----- -----
Income (Loss) Before Taxes............................. 8.5% (5.9%) (8.1%) (5.1%) (0.4%)
Income Tax Expense..................................... 3.3% 0.0% 0.0% 0.0% 0.0%
----- ----- ----- ----- -----
Net Income (Loss)...................................... 5.2% (5.9%) (8.1%) (5.1%) (0.4%)
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
RESULTS OF OPERATIONS
The results of operations have been segregated between medical and
management services.
SEVEN MONTHS ENDED JUNE 30, 1996 COMPARED TO SEVEN MONTHS ENDED JUNE 30, 1995
MEDICAL SERVICES
Net revenues from providing medical services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES.
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as follows.
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<PAGE>
FEE-FOR-SERVICE, NET. Fee-For-Service, net increased from $9.5 million
for the seven months ended June 30, 1995 to $10.8 million for the seven
months ended June 30, 1996, an increase of $1.3 million or 13.7%. This
increase correlates with the increase in the number of providers over the
same period.
PREPAID HEALTH CARE, NET. Prepaid Health Care, net increased from $12.7
million for the seven months ended June 30, 1995 to $13.2 million for the
seven months ended June 30, 1996, an increase of $500,000 or 3.9%. This
increase correlates with a 11.3% increase in the number of capitated
lives which was offset by a decrease in certain capitation rates.
PROVIDER COMPENSATION AND BENEFITS. Historically, Provider Compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by the clinic were based
upon arbitrary and subjective decisions made by Corvallis Clinic's Board of
Directors. Amounts of Provider Compensation distributed between providers
were based on mixtures of productivity and salary based formulas taking into
consideration historical and projected provider productivity. Provider
Compensation and Benefits decreased from $7.6 million for the seven months
ended June 30, 1995 to $6.3 million for the seven months ended June 30, 1996,
a decrease of $1.3 million or 17%. This decrease was the result of reduced
compensation amounts paid per physician in 1996 compared to 1995 as a result
of changes to the compensation plan calculation mechanics.
The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. Although the
impact can not be determined at this time, the amount available for Provider
Compensation and Benefits may also be effected by merger synergies and
management's ability to reduce costs or enhance revenues.
MANAGEMENT SERVICES
The historical operating expenses of Corvallis Clinic represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and
Benefits, which includes the salaries, wages and benefits of all
non-provider personnel, increased from $6.9 million for the seven months
ended June 30, 1995 to $7.7 million for the seven months ended June 30,
1996, an increase of $800,000 or 12.0%. The increase is the result of the
addition of new employees late in 1995 required to support the increase in
the number of providers. In addition, annual compensation increases
accounted for approximately 3% of the increase. As a percentage of Net
Revenues Less Provider Compensation and Benefits, clinic salaries, wages and
benefits decreased from 47.4% to 43.8% for the seven months ended June 30,
1995 and 1996 respectively. This decrease is due to the decrease in
compensation to providers.
PURCHASED MEDICAL SERVICES. Purchased Medical Services, which include
professional and diagnostic services performed by third parties, increased
from $3.0 million for the seven months ended June 30, 1995 to $3.7 million
for the seven months ended June 30, 1996, an increase of $700,000 or 23.3%.
This increase results from the additional use of externally provided managed
care services resulting from an increase in the number of providers.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies, which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $2.0 million for the seven months ended June 30, 1995 to $2.6
million for the seven months ended June 30, 1996, an increase of $600,000 or
30.0%. This increase results from the additional use of internally provided
services resulting from an increase in the number of providers and, to a
lesser extent, the modification of drug therapies for oncology patients.
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<PAGE>
GENERAL AND ADMINISTRATIVE. General and Administrative expenses
increased from $1.6 million for the seven months ended June 30, 1995 to $1.7
million for the seven months ended June 30, 1996, an increase of $100,000 or
6.3%. This increase is primarily due to an increase in insurance and other
overhead costs associated with the addition of new providers. As a
percentage of Net Revenue Less Provider Compensation and Benefits, General
and Administrative expenses decreased from 11.2% in 1995 to 9.7% in 1996.
The decrease is due to the fixed cost component of general and
administrative expenses remaining consistent relative to increased revenues.
OTHER NON-OPERATING INCOME. Other Non-Operating Income increased from
$156,000 for the seven months ended June 30, 1995 to $279,000 for the seven
months ended June 30, 1996, an increase of $123,000 or 78.8%. During the
year, Corvallis Clinic became a 50% member of HealthCare Partners which
manages and develops property used in providing medical services. The
increase in operating income was the result of income from HealthCare
Partners and increased income from Corvallis MRI and, to a lesser extent,
fees received for processing claims on behalf of third parties.
TWELVE MONTHS ENDED NOVEMBER 30, 1995 COMPARED TO TWELVE MONTHS ENDED NOVEMBER
30, 1994
MEDICAL SERVICES
Net revenues from providing medical services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES.
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as follows.
FEE-FOR-SERVICE, NET. Fee-For-Service, net increased from $19.5 million
for the 12 months ended November 30, 1994 to $20.7 million for the 12
months ended November 30, 1995, an increase of $1.2 million or 6.2%. The
increase is primarily attributable to the addition of 13 providers in the
last four months of 1995.
PREPAID HEALTH CARE, NET. Prepaid Health Care, net increased from $15.8
million for the 12 months ended November 30, 1994 to $18.5 million for
the 12 months ended November 30, 1995, an increase of $2.7 million or
17.0%. This increase correlates with the 21.4% increase in the number of
capitated lives. However, the addition of capitated lives from the new
senior plan were not added until October, 1995.
PROVIDER COMPENSATION AND BENEFITS. Historically, Provider Compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by the clinic were based
upon arbitrary and subjective decisions made by Corvallis Clinic's Board of
Directors. Amounts of Provider Compensation distributed between providers
were based on mixtures of productivity and salary based formulas taking into
consideration historical and projected provider productivity. Provider
Compensation and Benefits decreased from $13.7 million for the year ended
November 30, 1994 to $13.2 million for the year ended November 30, 1995, a
decrease of $500,000 or 3.6%. This decrease was the result of decreased
bonuses paid to the providers in 1995 versus 1994 due to reduced operating
results.
The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. Although the
impact can not be determined at this time, the amount available for Provider
Compensation and Benefits may also be effected by merger synergies and
management's ability to reduce costs or enhance revenues.
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<PAGE>
MANAGEMENT SERVICES
The historical operating expenses of Corvallis Clinic represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and
Benefits which includes the salaries, wages and benefits of all non-provider
personnel, increased from $10.4 million for the 12 months ended November 30,
1994 to $12.6 million for the 12 months ended November 30, 1995, an increase
of $2.2 million or 21.2%. This change is due to the increased number of
employees in anticipation of increasing the number of providers.
PURCHASED MEDICAL SERVICES. Purchased Medical Services, which include
professional and diagnostic services performed by third parties, increased
from $3.1 million for the 12 months ended November 30, 1994 to $4.7 million
for the 12 months ended November 30, 1995, an increase of $1.6 million or
51.6%. Purchased medical services as a percentage of prepaid health care
increased from 19.5% for the 12 months ended November 30, 1994 to 25.5% for
the 12 months ended November 30, 1995. This increase results from the
additional use of externally provided managed care services, by existing
members, and from an increase in the number of providers and capitated
lives.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies, which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $3.3 million for the 12 months ended November 30, 1994 to
$3.8 million for the 12 months ended November 30, 1995, an increase of
$500,000 or 15.1%. This increase is due to the number of providers added in
the last four months of 1995 and increased number of office visits.
GENERAL AND ADMINISTRATIVE. General and Administrative expenses
increased from $3.2 million for the twelve months ended November 30, 1994 to
$3.6 million for the 12 months ended November 30, 1995, an increase of
$400,000 or 12.5%. General and Administrative expenses as a percentage of
Net Revenue Less Provider Compensation and Benefits decreased from 14.6% for
the 12 months ended November 30, 1994 to 13.7% for the 12 months ended
November 30, 1995. The increase in General and Administrative expenses was
the result of increased recruiting costs for the addition of 13 new
providers and additional legal costs incurred for the creation of HealthCare
Partners.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for Uncollectible
Accounts increased from $1.2 million for the 12 months ended November 30,
1994 to $1.8 million for the 12 months ended November 30, 1995, an increase
of $600,000 or 50.0%. This increase was the result of changes in business
office personnel during the period which resulted in lower collection of
receivables generated during the period. New business office personnel put
in place at the end of 1995 implemented policies to improve the collection
rate on private pay patients.
OTHER NON-OPERATING INCOME. Other Non-Operating Income increased from
$166,000 for the 12 months ended November 30, 1994 to $738,000 for the 12
months ended November 30, 1995, an increase of $572,000 or 344.6%. The
increase is primarily due to increased income from Corvallis MRI, the
investment in HealthCare Partners, and fees received for processing claims
on behalf of third parties.
INTEREST EXPENSE. Interest Expense increased from $780,000 for the 12
months ended November 30, 1994 to $1.2 million for the 12 months ended
November 30, 1995, an increase of $420,000 or 53.8%. The increase in
interest expense was due to increased borrowings for new clinic space and
purchase of equipment, as well as interest cost related to a financing lease
obligation.
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<PAGE>
TWELVE MONTHS ENDED NOVEMBER 30, 1994 COMPARED TO TWELVE MONTHS ENDED NOVEMBER
30, 1993
MEDICAL SERVICES
Net revenues from providing medical services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES.
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as follows.
FEE-FOR-SERVICE, NET. Fee-For-Service, net increased from $16.4 million
for the 12 months ended November 30, 1993 to $19.5 million for the 12
months ended November 30, 1994, an increase of $3.1 million or 19.0%.
This increase was due to an increase in patient visits of 12% and the
addition of Philomath Family Medicine in May, 1993, which was composed of
substantially all fee-for-service providers.
PREPAID HEALTH CARE, NET. Prepaid Health Care, net increased from $13.5
million for the 12 months ended November 30, 1993, to $15.8 million for
the 12 months ended November 30, 1994, an increase of $2.3 million or
17.0%. This correlates with a 17.1% increase in capitated lives.
PROVIDER COMPENSATION AND BENEFITS. Historically, Provider Compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by the clinic were
based upon arbitrary and subjective decisions made by the Corvallis
Clinic's Board of Directors. Amounts of Provider Compensation distributed
between providers were based on mixtures of productivity and salary based
formulas taking into consideration historical and projected provider
productivity. Provider Compensation and Benefits increased from $7.1
million for the year ended November 30, 1993 to $13.7 million for the
year ended November 30, 1994 an increase of $6.6 million or 93.0%. This
increase was the result of bonuses paid to providers in 1994 which
stemmed from a significant cash basis income.
The amount available for Provider Compensation and Benefits will be
directly effected by the amount of the management fee to be paid to PPI.
Although the impact can not be determined at this time, the amount
available for Provider Compensation and Benefits may also be effected by
merger synergies and management's ability to reduce costs or enhance
revenues.
MANAGEMENT SERVICES The historical operating expenses of Corvallis Clinic
represent the costs incurred in the Management Services portion of the business.
Such costs will be reimbursed to PPI in the future as a component of the
management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and
Benefits which include the salaries, wages and benefits of all non-provider
related personnel, increased from $10.2 million for the 12 months ended
November 30, 1993 to $10.4 million for the 12 months ended November 30,
1994, an increase of $200,000 or 2.0%. Clinic Salaries, Wages and Benefits,
as a percentage of Net Revenues Less Provider Compensation and Benefits,
increased from 44.6% in 1993 to 48.1% in 1994. This increase was the result
of increasing the number of employees in anticipation of future growth and
the addition of Philomath Family Medicine in May of 1993.
PURCHASED MEDICAL SERVICES. Purchased Medical Services, which include
professional and diagnostic services performed by third parties, increased
from $2.7 million for the 12 months ended November 30, 1993 to $3.1 million
for the 12 months ended November 30, 1994, an increase of $400,000 or 14.8%.
This increase is primarily the result of the growth in capitated lives.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies, which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $3.0 million for the 12
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<PAGE>
months ended November 30, 1993 to $3.3 million for the 12 months ended
November 30, 1994, an increase of $300,000 or 10.0%. This increase is due to
the 12% increase in patient visits.
GENERAL AND ADMINISTRATIVE. General and Administrative expenses
increased from $2.4 million for the twelve months ended November 30, 1993 to
$3.2 million for the 12 months ended November 30, 1994, an increase of
$800,000 or 33.3%. As a percentage of Net Revenues Less Provider
Compensation and Benefits, General and Administrative expenses increased
from 10.7% in 1993 to 14.6% in 1994. The increase in General and
Administrative expenses resulted from higher costs incurred for professional
liability insurance, temporary employees, and consultant fees.
LIQUIDITY AND CAPITAL RESOURCES
The working deficit for Corvallis Clinic has increased from $1.3 million at
November 30, 1995 to $1.8 million at June 30, 1996, for an increase of $500,000
or 38.5%. This increase was the result of additional short term borrowings used
to finance operations and the purchase of equipment. As a result of the Merger,
PPI will assume the financing activities relating to the working capital needs
of Corvallis Clinic. See "PPI Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Investing activities which consisted primarily of property, plant, and
equipment purchases in the first seven months of 1996 required $700,000 of cash.
For the 12 months ended November 30, 1995, investing activities required $3.2
million. These activities primarily consisted of payouts to general contractors
and architects for the development, design and construction of the Asbury
building remodeling project and the initial construction of the Albany Family
Medicine building. PPI and Corvallis Clinic will negotiate and agree upon the
annual capital budget and the related terms of providing the needed financing as
part of the activities of the Joint Management Board. See "PPI Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Operation, Management and Business of PPI Following the Merger."
Financing activities generated $1.3 million for the seven months ended June
30, 1996, compared to $5.2 million for the 12 months ended November 30, 1995.
Corvallis Clinic's short-term borrowings under line-of-credit agreements
produced $1.8 million for the seven months ended June 30, 1996, and $1.4 million
for the 12 months ended November 30, 1995. In addition, Corvallis Clinic
received $2.7 million for HealthCare Partners relating to the direct financing
lease obligation. Corvallis Clinic is entitled to receive 50% of HealthCare
Partners distributed profits in future years, and accordingly, the Clinic is
obligated to make lease payments to HealthCare Partners. Also in 1995, Corvallis
Clinic converted its equipment-line-of-credit of $1.2 million into a four year
fixed-term note.
Corvallis Clinic has credit arrangements as of June 30, 1996 as follows: a
short-term working capital line-of-credit in the aggregate amount of $2.5
million and an equipment credit facility in the amount of $1.4 million. PPI will
seek to combine Corvallis Clinic's short-term line of credit into a consolidated
PPI line of credit. See "PPI Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Operation, Management and Business of
PPI Following the Merger--Practice Management Agreement."
Corvallis Clinic management believes it has sufficient funds and short-term
borrowing capacity to finance its operation through the end of 1996. Corvallis
Clinic recognizes that in order to finance the continued long-term growth of the
organization it needs to increase its ability to access capital. See "The Merger
and Related Transactions--Corvallis Clinic's Reasons for the Merger."
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<PAGE>
BUSINESS OF MEDFORD CLINIC
GENERAL
Medford Clinic is a multi-specialty group formed in 1946 and now organized
as an Oregon professional corporation. Medford Clinic provides professional
health care services on both a prepaid and fee-for-service basis in the greater
Medford, Oregon area. Medford Clinic contracts directly with health plans and
PPOs to provide medical services to enrollees who have selected a Medford Clinic
physician as their primary health care provider. Through contracts with various
health plans, as of June 30, 1996, Medford Clinic physicians were responsible
for the health care of approximately 24,000 health plan members. Medford Clinic
operates nine clinical locations as well as several hospital-based locations in
the Medford area.
Medford Clinic has grown through a combination of acquisitions of medical
practices that complement its services and recruitment of individual associate
physicians in needed practice areas. In order for Medford Clinic to provide its
patients with the necessary specialty services, Medford Clinic contracts with
providers of such specialties that Medford Clinic physicians do not practice.
For example, Medford Clinic has contracts with independent orthopedics and
radiology groups to provide services to patients covered under capitated health
plan contracts.
In 1993, Medford Clinic acquired all of the interest of Rogue Valley Medical
Center ("RVMC") in an entity called Rogue Valley Dialysis Services ("RVDS"), a
joint venture that was organized by Medford Clinic and RVMC in 1987. The joint
venture with RVMC was terminated effective July 1, 1993, and Medford Clinic
acquired RVMC's share of the assets in the joint venture. Medford Clinic
currently operates the RVDS center under the marketing name "Rogue Valley
Dialysis Services." After the Merger, PPI will succeed to financial liabilities
associated with the acquisition of the RVDS center.
Medford Clinic also owns and operates another dialysis center under the name
"Redwood Dialysis Center" and manages dialysis units and provides dialysis
services at three local hospitals (Providence Medford Medical Center and RVMC in
Medford, and Merle West Medical Center in Klamath Falls, Oregon).
In addition, Medford Clinic is the sole member of Medford Clinic Foundation,
an Oregon nonprofit corporation (the "Foundation"). The Foundation was organized
in 1979. In February 1980, the Foundation obtained from the Internal Revenue
Service a determination of federal tax-exempt status as a Section 501(c)(3)
organization which is not a private foundation. The Foundation generally engages
in raising funds that are distributed to individuals or entities whose grant
proposals are approved. All grants must be used for worthy purposes that benefit
the Medford community.
STRATEGY
Medford Clinic's strategy is to continue penetration of its existing
markets, expand into other markets, create strategic alliances with hospitals,
increase the operational efficiency of, and reduce costs associated with, the
Medford Clinic operations.
The future growth of Medford Clinic in its existing markets is dependent in
part on the continued increase of health plan enrollees using Medford Clinic
providers for medical services on a capitated basis. This growth may come, with
respect to professional services, from the development or acquisition of
additional facilities; and the development of affiliations with medical groups
serving enrollees in existing markets, increased enrollment in health plans
currently contracting with Medford Clinic and its medical affiliates, and
contracts with new health plans. Medford Clinic has added ancillary services to
reduce dependence on outside providers. It actively recruits new providers and
seeks to enter into new managed care contracts in order to enlarge the potential
patient base in its service areas.
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Medford Clinic's principal strategy for expanding into new markets is
through acquisitions (through purchase, merger, or otherwise) of medical groups.
Medford Clinic generally seeks providers that provide needed specialties and
that have established reputations for providing quality medical care. Medford
Clinic has also sought to expand its existing operations through the development
of its clinics. Medford Clinic also will consider opportunities to enter into
contractual arrangements with providers of necessary physician or ancillary
services in existing or new markets.
Medford Clinic seeks to increase its operating efficiency through a variety
of factors, including refinement of its utilization management programs that
deliver information used by its providers to monitor and improve their practice
patterns, increased specialization and the development of additional in-house
services. Medford Clinic has implemented cost reductions in 1994 and 1995, and
such efforts are continuing. Cost reductions to date have included restructuring
of salary levels for professional staff, reorganization of certain ancillary
services and alternate approaches to purchasing specialty medical care services.
Medford Clinic's costs consist primarily of providers and non-provider
compensation and benefits.
Medford Clinic has recently launched the development of two new operating
technologies designed to increase productivity and improve service. The first is
a computerized nurse triage program launched in July 1996, which is operational
five days per week. The second is the AutoChart Electronic Medical Record
currently being piloted in the Specialty Medicine Department of the clinic. Both
technologies are somewhat unique in the local market and are being implemented
to increase productivity and improve service to patients.
Medford Clinic intends to pursue Medical Quality Commission accreditation
under the auspices of AMGA in 1997. Management believes that such accreditation
will further its marketability and business prospects.
GOVERNMENT REGULATION
Medford Clinic is subject to federal and state laws regulating the
relationships among providers of health care services, physicians and other
clinicians. These laws include the fraud and abuse provisions of the Medicare
and Medicaid statutes, which prohibit the solicitation, payment, receipt or
offering of any direct or indirect remuneration for the referral of Medicare or
Medicaid patients or for the recommending, leasing, arranging, ordering or
purchasing of Medicare or Medicaid covered services. Other laws impose
significant penalties for false or improper billings for physician services and
impose restrictions on physician referrals for designated health services
reimbursable under the Medicare or Medicaid programs to entities with which they
have financial relationships. See "Physician Practices Management Industry--
Government Regulation". While Medford Clinic believes it is in material
compliance with applicable laws, there is no assurance that its present or past
operations will not be subjected to scrutiny or legal challenges.
SERVICES PROVIDED
Medford Clinic operates seven clinics that are staffed by primary care
providers and various medical and surgical specialists. As of November 1, 1996,
Medford Clinic employed 36 primary care and 31 specialist providers. Medford
Clinic's providers and non-provider professionals provide a wide variety of
medical care. Medford Clinic's primary care services include family practice,
internal medicine and pediatrics. Medford Clinic also utilizes the services of
eight nurse practitioners and one physician assistant. Medford Clinic also
provides services, such as hemodialysis and chemotherapy, through local
hospitals. At certain locations, Medford Clinic also operates centers for
ambulatory surgery, urgent care, cancer
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management, hemodialysis and allergy treatment. Medford Clinic provides the
following professional services:
<TABLE>
<S> <C>
Allergy and Asthma Obstetries
Cardiology Oncology and Hematology
Dermatology Otolaryngology
Endoctinology Pediatrics
Family Practice Podiatry
Gastroenterology Rheumatology
Surgery -- General and
Gynecology Vascular
Infectious Disease Urgent Care
Internal Medicine Urology
Nephrology
</TABLE>
Under capitated contracts, Medford Clinic provides or arranges for all
physician services and Medford Clinic receives a fixed monthly capitation
payment from health plans for each member who chooses a Medford Clinic physician
as his or her primary care physician. Contracts with prepaid health plans
(including PacifiCare, Secure Horizons and Oregon Health Plan) accounted for
approximately 13% of Medford Clinic's consolidated operating revenue in fiscal
1995. To the extent that enrollees require more care than is anticipated or
require supplemental medical care which is not otherwise reimbursed by the
payors, aggregate capitation payments may be insufficient to cover the costs
associated with the treatment of enrollees. If such revenue is insufficient,
Medford Clinic maintains stop-loss coverage which mitigates the effect of
occasional high utilization of health care services. Enrollment is categorized
as "commercial" for enrollees under the age of 65 whose health coverage is
generally sponsored by employers or "senior" for retired enrollees over the age
of 65 covered by Medicare. Higher capitation rates are typically received for
senior patients, because their medical needs are generally greater and
consequently the cost of covered care is higher.
At June 30, 1996, over 24,000 managed care enrollees were covered
beneficiaries for professional services by Medford Clinic. Health plans
currently under contract with Medford Clinic include Blue Cross, HMO of Oregon,
Good Health Plan, MetraHealth, Vantage Health Services and others.
ENROLLEES OF AT-RISK HEALTH PLANS UNDER CONTRACT WITH
MEDFORD CLINIC
(AS OF JUNE 30, 1996)
<TABLE>
<CAPTION>
ENROLLED % OF TOTAL
--------------------------------- -----------
<S> <C> <C>
Commercial...................................... 11,966 57.6
Medicaid........................................ 5,238 25.2
Medicare........................................ 3,575 17.2
------ -----
TOTAL........................................... 20,779 100.0%
------ -----
------ -----
</TABLE>
Medford Clinic closely monitors the need of health plan enrollees to access
specialists and the utilization of outside providers to ensure efficient and
appropriate delivery of care on a day-to-day basis. The Medical Director and
Utilization Review Team review and authorize requests for referrals to outside
providers on a daily basis. Medford Clinic's utilization review staff monitors
enrollees receiving care outside of the Medford Clinic locations. Claims for
payment to outside providers are scrutinized through a similar process;
physicians and Medford Clinic's claims payments administrative staff routinely
examine claims for appropriate medical charges.
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<PAGE>
MARKETING AND DEVELOPMENT
Medford Clinic developed a comprehensive strategic plan which delineates
target markets. Subsequent planning analyses indicate that there are 260,000
residents in the primary service area of Jackson and Josephine counties. The
strongest growth is in the City of Medford and its outlying development areas.
Medford Clinic is considering development of additional primary care satellites
to accommodate future population and managed care growth.
COMPETITION
The health care industry is highly competitive. The industry is also subject
to continuing changes in the services that are provided and how providers are
selected and paid.
Medford Clinic operates in the southern Oregon region and the northern
fringes of California and generally provides outpatient services to 30-40% of
the outpatient services market. The significant health care competitors in this
market are almost exclusively within the community of Medford. They include the
ASANTE Health System, which is comprised of one hospital in the city of Medford,
two hospitals in the city of Grants Pass, multiple subsidiaries related to
ancillary and support services, and a physician practice known as the Southern
Oregon Health Trust (with 35 primary care physicians).
A significant amount of competition comes from local hospitals. Medford
Clinic competes directly with the Southern Oregon Health Trust for primary care
services in the region. The Southern Oregon Health Trust is managed as a
department of Rogue Valley Medical Center in Medford. Although there is
increased competition with the Trust, Medford Clinic's primary care base
continues to grow in direct response to increasing patient demand. The existence
of the Southern Oregon Health Trust has apparently not inhibited Medford
Clinic's growth. Providence Medical Center also competes with Medford Clinic.
Providence Medford Medical Center owns and operates a primary care medical group
comprised of 15 primary care physicians.
In addition, Medford Clinic competes with a local IPA by the name of
PrimeCare with approximately 150 members physicians. This IPA is primarily
composed of specialists and competes directly with Medford Clinic.
EMPLOYEES
PROVIDER EMPLOYEES.
Medford Clinic physicians initially sign one-year associate employment
contracts. These contracts offer a specified guaranteed salary and an incentive
bonus. Physicians are also eligible to receive benefits such as health, dental
and life insurance, paid time off and an allowance for continuing medical
education and other professional expenses. At the end of the associate year, the
physician is eligible to become a shareholder. The transition must be approved
by both the individual physician and a 70% vote of the shareholders. A rigorous
peer review is completed prior to the offering of shareholder status. Medford
Clinic, as of November 1, 1996, employs 65 physicians (57 full-time and eight
part-time).
As of November 1, 1996, Medford Clinic employs eight nurse practitioners and
one physician assistant.
NON-PROVIDER EMPLOYEES
As of November 1, 1996, Medford Clinic had approximately 566 non-physician
employees (304 full time and 262 part-time), including approximately 60
employees working in the dialysis center. None of Medford Clinic's employees are
represented by a labor union. Management of Medford Clinic believes its employee
relations are good.
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INSURANCE
Medford Clinic maintains insurance coverage for various perils and from
various carriers. In addition to property and casualty, worker's compensation,
directors and officers liability and other coverage customary for Medford
Clinic's business, Medford Clinic maintains a general and professional liability
insurance policy (the "Liability Policy") with Norcal insurance and other
carriers. The Liability Policy provides for $1 million in coverage per claim and
$3 million aggregate annual coverage. Each professional of Medford Clinic, at
each location, is covered under the Liability Policy.
PROPERTIES AND FACILITIES
Medford Clinic owns two properties, the Redwood Dialysis Center and the
Rogue Valley Dialysis Center facilities. Medford Clinic leases its other
facilities from third parties. As of November 1, 1996, Medford Clinic leased
real estate for their clinics in eight locations in the Medford, Oregon area.
Medford Clinic leases an approximately 61,000 square foot building at 555 Black
Oak Drive in Medford which is occupied by its main administrative and clinical
facilities. In addition, Medford Clinic leases one other property used for
general administrative offices. Certain of Medford Clinic's leased facilities
are owned by shareholders of Medford Clinic.
INFORMATION SYSTEMS
Medford Clinic believes that the effective analysis of medical and financial
data is essential in today's managed care environment. Accordingly, Medford
Clinic is committed to the development of a fully-integrated management
information system ("MIS") for practice management. Medford Clinic's MIS
capabilities include nurse triage electronic medical charting and tracking
analysis of practice management information and financial data. Practice
management functions of the current MIS include registration, centralized
scheduling and appointments, electronic claims submission and remittance.
Managed care functions include referrals, eligibility, determination, claim
management and payment functions.
LEGAL PROCEEDINGS
Medford Clinic is engaged in the defense of lawsuits arising in the ordinary
course and conduct of its business. Medford Clinic believes that such actions
will not have a material adverse effect on Medford Clinic.
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DESCRIPTION OF CAPITAL STOCK OF MEDFORD CLINIC
As of November 1, 1996, the authorized capital stock of Medford Clinic
consists of 500 shares of Medford Clinic Common Stock. There are 57 shareholders
holding all of the issued and outstanding shares of Medford Clinic Common Stock.
It is anticipated that Medford Clinic will grant, prior to the Effective
Time, New Options exercisable for an aggregate of 10.6 shares of Medford Clinic
Common Stock.
All of the outstanding Medford Clinic Common Stock has been validly issued
and is fully paid and nonassessable. There are no outstanding options, warrants,
subscriptions, conversions or other rights, agreements or commitments obligating
Medford Clinic to issue any additional shares of Medford Clinic Common Stock or
any other securities convertible into, exchangeable for or evidencing the right
to subscribe, for any Medford Clinic Common Stock. There are no voting trusts or
other agreements or understandings to which Medford Clinic is a party with
respect to the voting of Medford Clinic Common Stock. Cash dividends were not
declared on the common equity of Medford Clinic in the 1995 or 1994 fiscal
years.
Shareholders of Medford Clinic currently are subject to various rights,
privileges and restrictions with respect to their shares of common stock in
Medford Clinic. Medford Clinic's bylaws specify that only licensed physicians
may be shareholders, and require that shareholders dispose of their stock in the
event of disqualification from practice or termination of employment by Medford
Clinic. Each Medford Clinic shareholder's employment agreement sets forth the
terms of employment and grounds for termination. Each shareholder of Medford
Clinic is also bound by the terms of a buy-sell agreement, which restricts the
transfer of shares and sets forth the grounds and procedure for redemption of a
shareholder's shares by Medford Clinic.
Medford Clinic has two versions of shareholder buy-sell agreement -- the
first version for shareholders who were shareholders as of November 1995 (the
"Buy-Sell Agreement"), the second version for physicians who become shareholders
after that date (the "New Buy-Sell"). Both the Buy-Sell Agreement and the New
Buy-Sell prohibit the transfer of Medford Clinic Common Stock by a shareholder,
except as provided in such agreement. Upon the occurrence of death or permanent
and total disability, termination of employment, reduction of practice to less
than half-time or bankruptcy of a shareholder, Medford Clinic is required to
repurchase all of such shareholder's stock in Medford Clinic for $10.
The only significant difference between the two versions of the buy-sell
agreement is that, under the New Buy-Sell, the right of new shareholders to
receive "Dissolution" proceeds is subject to a vesting period of three years (33
percent per year over three years), whereas each shareholder subject to a Buy-
Sell Agreement is fully vested from the effective date of such agreement. A
"Dissolution" is defined in clause (i) of Section 7.A of both the Buy-Sell
Agreement and the New Buy-Sell as an event in which Medford Clinic "has merged
with another entity, has sold all of its shares to another entity, or has sold
substantially all of its assets to another entity."
Under Section 7.A. of both the Buy-Sell Agreement and the New Buy-Sell, a
retired shareholder (i.e., an individual who was retired from Medford Clinic and
whose stock has been redeemed by Medford Clinic) is deemed to be a "Qualified
Retiree" if all of the conditions set forth in such section are satisfied.
Both the Buy-Sell Agreement and the New Buy-Sell provide that, upon the
occurrence of a Dissolution of Medford Clinic, any Present Consideration shall
be distributed in equal shares to all then-current shareholders, and that
Qualified Retirees are entitled to the following percentages of a shareholder
share:
(A) a Qualified Retiree whose shareholder status terminated less than one
year prior to the closing date of the Dissolution transaction shall be
entitled to 100% of a shareholder share;
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(B) a Qualified Retiree whose shareholder status terminated more than one
year and less than two years prior to the closing of the Dissolution
transaction shall be entitled to 66% of a shareholder share; and
(C) a Qualified Retiree whose shareholder status terminated more than two
years and less than three years prior to the closing date of a
Dissolution transaction shall be entitled to 33% of a shareholder share.
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<PAGE>
SELECTED FINANCIAL DATA OF MEDFORD CLINIC
The following table sets forth selected financial data which have been
derived from the financial statements as of and for the years ended December 31,
1991 through 1995. The accompanying Balance Sheets as of December 31, 1994 and
1995, and the related Statements of Operations, Stockholders' Equity and Cash
Flows as of and for the years ended December 31, 1993 through 1995 have been
audited by Arthur Andersen LLP Independent Accountants. The financial statements
as of and for the six month periods ended June 30, 1995 and 1996 have been
derived from the unaudited financial statements of Medford Clinic which, in the
opinion of management included all adjustments (which consist of only normal
recurring adjustments) necessary for a fair presentation of the information set
forth therein.
The following data should be read in conjunction with "Medford Clinic's
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this document.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31 ENDED JUNE 30
----------------------------------------------------- --------------------
STATEMENT OF OPERATIONS DATA: 1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Fee-For-Service, net................................ $ 14,907 $ 17,925 $ 22,805 $ 29,920 $ 33,951 $ 16,525 $ 17,161
Prepaid Health Care................................. -- -- 269 2,407 5,015 2,332 3,345
--------- --------- --------- --------- --------- --------- ---------
Total Net Revenues.................................... 14,907 17,925 23,074 32,327 38,966 18,857 20,506
Less Provider Compensation and Benefits............... (4,735) (5,647) (7,009) (9,248) (11,239) (5,281) (5,709)
--------- --------- --------- --------- --------- --------- ---------
Net Revenue Less Provider Compensation and Benefits... 10,172 12,278 16,065 23,079 27,727 13,576 14,797
Clinic Salaries, Wages & Benefits..................... 4,428 5,124 7,683 10,900 11,838 5,370 6,251
Purchased Medical Services............................ 522 592 758 920 2,283 803 1,768
Medical and Office Supplies........................... 1,695 1,934 3,368 4,676 5,578 2,832 2,674
General & Administrative.............................. 1,444 1,988 2,306 2,959 3,446 1,591 1,905
Provision for Uncollectible Accounts.................. 308 288 396 1,027 868 511 558
Lease and Rent Expense................................ 622 669 702 1,057 1,139 565 522
Depreciation and Amortization......................... 708 641 592 918 1,125 526 409
--------- --------- --------- --------- --------- --------- ---------
Total Operating Expenses.............................. 9,727 11,236 15,805 22,457 26,277 12,198 14,087
Operating Income...................................... 445 1,042 260 622 1,450 1,378 710
Other Non-Operating (Income) Expenses................. (262) (242) (49) -- -- -- --
Interest Income....................................... 27 25 19 27 97 17 69
Interest Expense...................................... 194 143 200 324 487 256 202
--------- --------- --------- --------- --------- --------- ---------
Income Before Taxes................................... 540 1,166 128 325 1,060 1,139 577
--------- --------- --------- --------- --------- --------- ---------
Income Tax Expense.................................... 203 413 44 133 408 425 231
--------- --------- --------- --------- --------- --------- ---------
Net Income............................................ 337 753 84 192 652 714 346
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
AS OF DECEMBER 31 AS OF JUNE 30
----------------------------------------------------- --------------------
BALANCE SHEET DATA: 1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Working Capital....................................... 680 1,398 2,511 2,838 3,053 4,010 2,387
Total Assets.......................................... 6,311 7,600 10,969 14,534 15,245 15,774 15,955
Long-Term Debt, net................................... 1,419 1,067 3,128 5,459 4,932 5,317 4,437
Stockholder's Equity.................................. 1,484 2,237 2,322 2,514 3,166 3,197 3,319
</TABLE>
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MEDFORD CLINIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
OVERVIEW
Medford Clinic is a primary care based multi-specialty medical clinic.
Medford Clinic was founded in 1946 and at June 30, 1996 consisted of 489
employees and 69 professional providers, who offer a wide range of primary and
specialty care at eight different locations. In addition, Medford Clinic offers
ancillary services such as radiology, pharmacy and laboratory services.
In 1994, Medford Clinic expanded its dialysis operations, opening a new
facility in Josephine County. Medford Clinic now provides dialysis services
through its Rogue Valley Dialysis Center which was operated as a joint venture
with Rogue Valley Medical Center ("RVMC") until 1993 when Medford Clinic
purchased RVMC's interest in a transaction accounted for as a purchase.
Historically, the operations of the Companies included both the provision of
medical services that will be provided by the New PCs and the management aspects
of the practice that will be carried on in the future by PPI. As such, it was
not necessary, nor did the Companies segregate their operating results by these
categories. Accordingly, the results discussed below will not reflect the
results that might have occurred had those businesses been operated separately.
The revenues are reported on a Fee-for-Service and Prepaid basis as follows:
FEE-FOR-SERVICE. Patient service revenues are recorded at established
rates in the period in which services are provided. Medford Clinic has
agreements with third-party payors that provide payments to Medford
Clinic at amounts different from its established rates. The difference
between charges generated from agreements with third party payors and the
related payment amounts are reflected as contractual discounts.
PREPAID. Medford Clinic contracts with various HMOs to provide care to
plan enrollees at prepaid monthly fixed capitation rates on a per member
basis. Under a prepaid contract, Medford Clinic assumes the obligation of
providing all contractually defined health care services to enrollees and
is obligated to reimburse outside Providers for services rendered to
enrollees. Included in some of these contracts is a provision that
Medford Clinic shares in risk for control of costs of inpatient hospital
services. Risk sharing contracts provide financial incentive to control
costs and provide financial penalties when costs exceed a predetermined
budget. To manage its liability to outside providers, Medford Clinic has
entered into contractual agreements with certain outside providers. These
arrangements are discounted fee for service arrangements. Additional
limitations on losses are provided by the payment of stop-loss
reinsurance premiums. In addition, the prepaid contracts contain minimum
threshold reimbursement levels which limit the downside risk.
The following table indicates the payor mix of the aggregate net clinic
revenue earned by Medford Clinic:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PAYOR JUNE 30, 1996
- --------------------------------------------------------------------------- -------------------
<S> <C>
Fee-For-Service:
Commercial and Private................................................... 65.3%
Medicare................................................................. 17.6%
Medicaid................................................................. 0.8%
Prepaid(6)................................................................. 16.3%
-----
100.0%
-----
-----
</TABLE>
- ------------------------
(6) Includes Commercial, Medicare and Medicaid prepaid programs.
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The table below sets forth the percentages of net revenue less compensation
to providers represented by certain items reflected in Medford Clinic's
Statements of Income. The information that follows should be read in conjunction
with the Financial Statements and notes thereto contained elsewhere.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31 ENDED JUNE 30
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Revenue Less Provider Compensation and Benefits......... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Clinic Salaries, Wages and Benefits......................... 47.8% 47.2% 42.7% 39.6% 42.2%
Purchased Medical Services.................................. 4.7% 4.0% 8.2% 5.9% 11.9%
Medical and Office Supplies................................. 21.0% 20.3% 20.1% 20.9% 18.1%
General and Administrative.................................. 14.3% 12.8% 12.4% 11.7% 12.9%
Lease and Rent Expense...................................... 4.4% 4.6% 4.2% 4.2% 3.5%
Provision for Uncollectible Accounts........................ 2.5% 4.4% 3.1% 3.8% 3.8%
Depreciation and Amortization............................... 3.7% 4.0% 4.1% 3.8% 2.8%
--------- --------- --------- --------- ---------
Total Operating Expenses.................................. 98.4% 97.3% 94.8% 89.9% 95.2%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Operating Income............................................ 1.6% 2.7% 5.2% 10.1% 4.8%
Other Non-Operating Income.................................. 0.3% 0.0% 0.0% 0.0% 0.0%
Interest Income............................................. 0.1% 0.1% 0.3% 0.1% 0.5%
Interest Expense............................................ 1.2% 1.4% 1.7% 1.9% 1.4%
--------- --------- --------- --------- ---------
Income Before Taxes......................................... 0.8% 1.4% 3.8% 8.3% 3.9%
Income Tax Expenses......................................... 0.3% 0.6% 1.5% 3.1% 1.6%
--------- --------- --------- --------- ---------
Net Income................................................ 0.5% 0.8% 2.3% 5.2% 2.3%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
MEDICAL SERVICES
Net revenues from providing Medical Services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES.
Net revenues consist of revenues received from Fee-for Service and Prepaid
Health Care activities as follows.
FEE-FOR-SERVICE, NET. Fee-For-Service, net increased from $16.5 million
for the six months ended June 30, 1995 to $17.2 million for the six
months ended June 30, 1996, an increase of $700,000 or 4.2%. Although
there were three fewer providers in the six months ended June 30, 1996,
compared to the same period ended June 30, 1995, this was offset by a 10%
increase in provider productivity.
PREPAID HEALTH CARE. Prepaid Health Care increased from $2.3 million for
the six months ended June 30, 1995 to $3.3 million for the six months
ended June 30, 1996, an increase of $1.0 million or 43.5%. This increase
correlates with 26% increase in the number of capitated lives and
expansion of contracted services over the same period.
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PROVIDER COMPENSATION AND BENEFITS. Historically, provider compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by Medford Clinic were
based upon arbitrary and subjective decisions made by the Medford Clinic
Board of Directors. Amounts of provider compensation distributed between
providers were based on mixtures of productivity and salary based formulas
taking into consideration historical and projected provider productivity.
Provider compensation and benefits decreased from $5.3 Million for the six
months ended June 30, 1995 to $5.7 million for the six months ended June 30,
1996, an increase of $400,000 or 7.5%. This increase was the result of higher
amounts paid per physician due to the increased productivity in 1996.
The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. Although the
impact can not be determined at this time, the amount available for Provider
Compensation and Benefits may also be effected by merger synergies and
management's ability to reduce costs or enhance revenues.
MANAGEMENT SERVICES
The historical operating expenses of Medford Clinic represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and Benefits,
which includes the salaries, wages and benefits of all non-provider personnel
increased from $5.4 million in the six months ended June 30, 1995 to $6.3
million in the six months ended June 30, 1996, an increase of $900,000 or
16.7%. As a percentage of Net Revenue Less Provider Compensation and
Benefits, salaries increased from 39.6% to 42.2% in the six months ended June
30, 1995 and 1996, respectively. The increase was due to staff added to
support increased productivity, a planned 7% increase in salaries and
benefits, and a staff bonus.
PURCHASED MEDICAL SERVICES. Purchased Medical Services which include
professional and diagnostic services performed by third parties, increased
from $800,000 in the six months ended June 30, 1995 to $1.8 million in the
six months ended June 30, 1996, an increase of $1.0 million or 125%. As a
percentage of Net Revenue Less Provider Compensation and Benefits, Purchased
Medical Services increased from 5.9% to 11.9% in the six months ended June
30, 1995 and 1996, respectively. The increase is due to increased prepaid
health care revenue and contractual changes with regard to services covered.
The majority of these newly covered services were purchased from outside
providers.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies which include
pharmaceuticals, medical supplies, offices supplies and diagnostic supplies,
decreased from $2.8 million in the six months ended June 30, 1995 to $2.7
million in the six months ended June 30, 1996 for a decrease of $100,000 or
3.6%. As a percentage of Net Revenues Less Providers Compensation and
Benefits, Medical and Office Supplies decreased from 20.9% to 18.1% for the
six months ended June 30, 1995 and 1996, respectively. The decrease was
attributable to decreased pharmacy sales in 1996 relative to 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and Administrative Expenses
increased from $1.6 million in the six months ended June 30, 1995 to $1.9
million in the six months ended June 30, 1996 for an increase of $300,000 or
18.75% due to costs incurred during 1996 with respect to the recruitment of
eight providers; additional marketing for those providers and a new satellite
clinic, legal expenses and collection agency fees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
decreased from $526,000 in 1995 to $409,000 in 1996, a decrease of $117,000
or 22.2%. The decrease is primarily due to the write-off of an intangible
lease cost during 1995.
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TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
MEDICAL SERVICES
Net revenues from providing medical services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES.
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as
follows.
FEE-FOR-SERVICE, NET. Fee-For-Service, net increased from $29.9 million
for the 12 months ended December 31, 1994 to $34.0 million for the 12
months ended December 31, 1995, an increase of $4.1 million or 13.7%.
This increase was attributable to the addition of 10 new providers in
mid-1994.
PREPAID HEALTH CARE. Prepaid Health Care increased from $2.4 million for
the 12 months ended December 31, 1994 to $5.0 million for the twelve
months ended December 31, 1995, an increase of $2.6 million or 108.3%.
This increase correlates with the 79% increase in the number of capitated
lives over the same period combined with an expansion of contracted
covered services for certain plans.
PROVIDER COMPENSATION AND BENEFITS. Historically, provider compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by the clinic were based
upon arbitrary and subjective decisions made by the Medford Clinic Board of
Directors. Amounts of provider compensation distributed between providers
were based on mixtures of productivity and salary based formulas taking into
consideration historical and projected provider productivity. Provider
compensation and benefits increased from $9.2 million for the year ended
December 31, 1994 to $11.2 million for the year ended December 31, 1995, an
increase of $2.0 million or 21.7%. This increase was the result of the
addition of ten new providers in mid 1994.
The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. Although the
impact can not be determined at this time, the amount available for Provider
Compensation and Benefits may also be effected by merger synergies and
management's ability to reduce costs or enhance revenues.
MANAGEMENT SERVICES
This historical operating expenses of Medford Clinic represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and Benefits,
which includes the salaries, wages and benefits of all non-provider personnel
increased from $10.9 million in 1994 to $11.8 million in 1995 for an increase
of $900,000 or 8.3%. The increase was attributable to the addition of new
support personnel related to the addition of 10 new providers in mid-1994. As
a percentage of revenue, salaries decreased from 47.2% to 42.7% in 1994 and
1995, respectively. This decrease is primarily due to implementation of an
administrative plan to reduce personnel cost per provider.
PURCHASED MEDICAL SERVICES. Purchased Medical Services which include
professional and diagnostic services performed by third parties, increased
from $900,000 in 1994 to $2.3 million 1995, an increase of $1.4 million or
155.6%. As a percentage of Net Revenue Less Provider Compensation and
Benefits, purchased medical services increased from 4.0% to 8.2% in 1994 and
1995, respectively. The increase is attributed to a 108% increase in prepaid
health care revenues combined with an expansion of contracted covered
services for certain plans.
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MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $4.7 million in 1994 to $5.6 million in 1995 an increase of
$900,000 or 19.1%. The increase correlates with the increase in total
revenues.
GENERAL AND ADMINISTRATIVE. General and Administrative Expenses increased
from $3.0 million in 1994 to $3.4 million in 1995, an increase of $400,000 or
13.3%. The increase is attributable to the increased activity due to the
addition of providers. As a percentage of Net Revenue Less Provider
Compensation and Benefits, General and Administrative expense remained
relatively stable.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for Uncollectible Accounts
decreased from $1,027,000 in 1994 to $868,000 in 1995, a decrease of $159,000
or 15.4%. As a percentage of Net Revenue Less Provider Compensation and
Benefits, Provision for Uncollectible Accounts remained relatively stable.
The decrease between years is due to improved collection experience as a
result of the completed implementation of a new patient accounting system
purchased in late 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization Expenses
increased from $918,000 in 1994 to $1,125,000 in 1995, an increase of
$207,000 or 22.5%. The increase is a result of additional capital
expenditures, including a new computer system purchased in late 1994.
INTEREST EXPENSE. Interest Expense increased from $324,000 in 1994 to
$487,000 in 1995, an increase of $163,000, or 50.3%. This increase was
attributable to increased debt obligations in 1995 incurred to fund computer
equipment purchases, another dialysis center building and the furnishings and
equipment for two new satellite locations.
TWELVE MONTHS ENDED DECEMBER 31, 1994 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1993
MEDICAL SERVICES
Net revenues from providing medical services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES.
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as follows.
FEE-FOR-SERVICE, NET. Fee-For-Service, net increased from $22.8 million
for the 12 months ended December 31, 1993 to $29.9 million for the 12
months ended December 31, 1994, an increase of $7.1 million or 31.1%. The
increase is primarily attributable to the increased number of patient
visits resulting from the addition of 22 new providers, the purchase of
the remaining interest in a 20 station dialysis center in mid-1993 and
the addition of 10 new providers in 1994.
PREPAID HEALTH CARE. Prepaid Health Care increased from $300,000 for the
12 months ended December 31, 1993 to $2.4 million for the 12 months ended
December 31 1994, an increase of $2.1 million or 700%. This increase
correlates with introduction of the Oregon Health Plan, the Oregon
managed Medicaid program.
PROVIDER COMPENSATION AND BENEFITS. Historically, provider compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by Medford Clinic were
based upon arbitrary and subjective decisions made by the Medford Clinic
Board of Directors. Amounts of provider compensation distributed between
providers were based on mixtures of productivity and salary based formulas
taking into consideration historical and projected provider productivity.
Provider compensation and benefits increased from $7.0 million for the year
ended December 31, 1993 to $9.2 million for the year ended December 31, 1994,
an increase of $2.2 million or 31.4%. This increase was the result of the
addition of 22 new providers during 1994.
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The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. Although the
impact can not be determined at this time, the amount available for Provider
Compensation and Benefits may also be effected by merger synergies and
management's ability to reduce costs or enhance revenues.
MANAGEMENT SERVICES
The historical operating expenses of Medford Clinic represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and Benefits,
which includes the salaries, wages and benefits of all non-provider personnel
increased from $7.7 million in 1993 to $10.9 million in 1994 for an increase
of $3.2 million or 41.6%. The increase was attributable to the addition of
support personnel related to the increased number of Providers and the
addition of the dialysis centers mid-1993 and 1994. As a percentage of Net
Revenue Less Provider Compensation and Benefits, Salaries, Wages and Benefits
remained relatively stable.
PURCHASED MEDICAL SERVICES. Purchased Medical Services which include
professional and diagnostic services performed by third parties increased
from $758,000 in 1993 to $920,000 in 1994, an increase of $162,000 or 21.4%.
This increase is attributed to the increase in prepaid healthcare revenue.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $3.4 million in 1993 to $4.7 million in 1994, an increase of
$1.3 million or 38.2%. The increase was consistent with the increased
revenues attributable to the addition of Providers and the dialysis centers.
As a percentage of Net Revenue Less Provider Compensation and Benefits,
Medical and Office Supplies remained relatively stable.
GENERAL AND ADMINISTRATIVE. General and Administrative Expenses increased
from $2.3 million in 1993 to $3.0 million in 1994, an increase of $700,000 or
30.4%. This increase is attributable to the addition of providers in mid-1993
and 1994. As a percentage of Net Revenue Less Provider Compensation and
Benefits, General and Administrative expenses decreased from 14.3% to 12.8%
from 1993 to 1994, respectively. This percentage decrease is attributable to
cost containment programs in General and Administrative expenses and
economies of scale achieved through the 56% increase in providers without a
corresponding increase in the fixed component of general and administrative
expense.
LEASE AND RENT EXPENSE. Lease and rent expense increased from $700,000 in
1993 to $1.1 million in 1994, an increase of $400,000 or 57.1%. The increase
was attributable to the addition of a new satellite location in Talent,
Oregon and the addition of two facilities in Ashland, Oregon and an
orthopedic clinic in Medford, Oregon. As a percentage of Net Revenue Less
Provider Compensation and Benefits, Lease and Rent Expense remained
relatively stable.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased from $592,000 in 1993 to $918,000 in 1994, an increase of $326,000
or 55.1%. The increase is a result of additional capital expenditures
required to support the addition of providers and the acquisition of the
dialysis centers. As a percentage of Net Revenue Less Provider Compensation
and Benefits, Depreciation and Amortization remained relatively stable.
OTHER NONOPERATING INCOME. Prior to June 30, 1993, Medford Clinic owned a
50% partnership interest in the Rogue Valley Dialysis Center. The amount
reflected in other income represents the company's share of net income of the
dialysis center. This entity was acquired in its entirety as of July 1, 1993.
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INTEREST EXPENSE. Interest expense increased from $200,000 in 1993 to
$324,000 in 1994, an increase of $124,000, or 62.0%. This increase was
attributable to increased expense on debt obligations totalling approximately
$6.1 million in 1994 as compared to $3.4 million in 1993. The $2.7 million of
incremental borrowings were used to fund a new computer system, build and
equip the Redwood Dialysis Center and equip the new Talent Medical Center, a
satellite clinic.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, Medford Clinic had $2.4 million in working capital, down
from $3.0 million as of December 31, 1995. This decrease is primarily due to an
accrued bonus commitment to be paid to providers and non-provider personnel
based on positive financial results in the first six months of 1996. As a result
of the Merger PPI will assume the financing activities relating to the working
capital needs of Medford Clinic. See "PPI Management's Discussion and Analysis
of Financial Condition and Results of Operations".
Medford Clinic generated $1.9 million of cash flow from operations in the
six months ended June 30, 1996 compared to $1.6 million for the six months ended
June 30, 1995. At June 30, 1996, net accounts receivable of $6.9 million
amounted to 73 days of net clinic revenue compared to $6.7 million and 72 days
at the end of the prior year.
Capital expenditures were $731,000 in the first six months of 1996 and it is
anticipated another $800,000 will be spent by year-end 1996. These purchases
include furnishings and equipment for a new medical facility to be opened in
August 1996. PPI and Medford Clinic will negotiate and agree upon the annual
capital budget and the related terms of providing the needed financing as part
of the activities of the Joint Management Board. See "PPI Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Operation, Management and Business of PPI Following the Merger."
Medford Clinic has maintained a $500,000 Operating Line of Credit with U.S.
Bank, which has not been utilized since February 1995. A restricted investment
of $243,000 on deposit for the State of Oregon Medicaid program; due to a change
in contractual relations, will be released in April 1997. PPI will seek to
combine Medford Clinic's short-term line of credit into a consolidated PPI line
of credit. See "PPI Management's Discussion and Analysis of Financial Condition
and Results of Operations--Operation, Management and Business of PPI Following
the Merger--Practice Management Agreement".
Medford Clinic believes that the funds available from cash reserves and cash
flow from operations should be sufficient to meet the planned capital
expenditures and working capital needs through 1996. Medford Clinic recognizes
that in order to finance the continued long-term growth of the organization it
needs to increase its ability to access capital. See "The Merger and Related
Transactions--Medford Clinic's Reasons for the Merger."
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PROPOSAL NO. 3
APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL
The shareholders of each Company are being asked to approve the Physician
Partners, Inc. Employee Stock Option Plan (the "Employee Plan"), the Physician
Partners, Inc. Non-Employee Director Stock Option Plan (the "Director Plan"),
the Physician Partners, Inc. Non-Employee Provider Stock Option Plan (the
"Provider Plan") and the Physician Partners, Inc. Change in Control Plan (the
"Change in Control Plan"), pursuant to which an aggregate of up to 2,500,000
shares of PPI Class A Common Stock will be reserved for issuance. The
HealthFirst Board, the Corvallis Clinic Board and the Medford Clinic Board have
each authorized the implementation of the PPI Incentive Compensation Plans to
become effective at the Effective Time, provided shareholder approval of each
Company is obtained.
The following are summaries of the principal features of each of the PPI
Incentive Compensation Plans. Such summaries do not purport to be complete
descriptions of all of the provisions of each of the PPI Incentive Compensation
Plans and are qualified in their entirety by the full text of such plans, which
are attached as Appendices B, C and D to this Joint Proxy Statement/Prospectus.
EMPLOYEE STOCK OPTION PLAN
PURPOSE
The Employee Plan was established to (i) furnish incentives to eligible
employees chosen to receive options because they are considered capable of
responding by improving operations of PPI and increasing profits, (ii) encourage
selected employees to accept or continue employment with PPI and (iii) increase
the interest of selected employees and officers in PPI's welfare through their
participation in the growth in value of PPI Class A Common Stock. The effective
date of the Employment Plan is December 31, 1996, provided that shareholder
approval of each Company is obtained.
ELIGIBLE PERSONS
Every person who is an employee or officer of PPI or of certain affiliates
of PPI or any individual subject to an acquisition or management agreement with
PPI is eligible to receive options. There will be approximately 1,600 eligible
participants.
ADMINISTRATION
The Employee Plan will be administered by a committee (the "Employee Plan
Committee") of not less than three members appointed by the PPI Board (or if no
such Employee Plan Committee shall have been formed, by the PPI Board).
Currently, no Employee Plan Committee has been constituted.
STOCK OPTION GRANTS
No more than 900,000 shares of PPI Class A Common Stock will be issued under
the Employee Plan. If options expire or are terminated for any reason prior to
being exercised in full, the shares for which such options are exercisable shall
become available for future grants.
Grants may be for "incentive stock options" pursuant to Section 422 of the
Code or non-statutory stock options. These two types of options are similar,
except for their tax consequences. Upon the grant of either a non-statutory
stock option or an incentive stock option, the recipient will not recognize any
income for tax purposes; the granting company will not be entitled to a tax
deduction. However, the tax consequences vary upon exercise. When a
non-statutory stock option is exercised, the holder recognizes ordinary income
in an amount equal to the excess of the fair market value of the shares acquired
over the option price; the company is entitled to a corresponding deduction. In
contrast, upon exercise of an incentive stock option, the holder does not
recognize income; the granting company is not entitled to a deduction.
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All stock options granted by PPI shall be evidenced by written agreements
between PPI and the optionee thereunder that are consistent with the Employee
Plan. The purchase or exercise price of such stock options shall be determined
by the Employee Plan Committee. The exercise price with respect to incentive
stock options shall not be less than the fair market value of PPI Class A Common
Stock on the date of grant thereof. The exercise price with respect to stock
options shall not be less than 85% of the fair market value on the date of grant
thereof (provided that such exercise price for any person who owns, directly or
indirectly (or is treated as owning by reason of attribution rules currently set
forth in Section 424 of the Code), capital stock of PPI constituting more than
10% of the total combined voting power of all classes of outstanding capital
stock of PPI or of certain affiliates of PPI, shall in no event be less than
100% of such fair market value). The term of each option granted under the
Employee Plan shall be fixed by the Employee Plan Committee provided that no
option shall be granted with a term of more than 10 years. PPI shall not grant
any options which may become exercisable at a rate in excess of 20% per annum
from the date of such grant without the written consent of a majority of the
members of the Employee Plan Committee. Options are granted under the Employee
Plan in consideration for services rendered, or to be rendered, by the optionee
thereunder.
PAYMENT
Payment of the exercise price with respect to stock options granted under
the Employee Plan may be made in cash or, with the consent of the Employee Plan
Committee, with a full-recourse promissory note, shares of PPI Class A Common
Stock then valued at fair market value, any other property acceptable to the
Employee Plan Committee or a combination of such forms of payment.
TRANSFERABILITY OF OPTIONS AND TERMINATION OF EMPLOYMENT
During the lifetime of an optionee holding stock options granted under the
Employee Plan, only such optionee or such optionee's guardian or legal
representative may exercise the option. No such option shall be assigned or
transferred other than by will or the laws of descent and distribution. Each
such option will expire on the date of termination of employment "for cause" of
the optionee. Each optionee holding stock options granted under the Employee
Plan will have the right to exercise such options within 90 days of termination
of employment without cause of such optionee. Each optionee holding stock
options granted under the Employee Plan, or such optionee's personal
representative, will have the right to exercise such option within 12 months
after the date of termination of employment by reason of the permanent
disability or death of such optionee.
AMENDMENT AND TERMINATION
The Employee Plan permits the PPI Board to at any time amend, alter, suspend
or discontinue such Employee Plan, provided that no such amendment may be
effected with respect to any outstanding option, without the consent of the
optionee holding such option.
CHANGES IN CAPITALIZATION
Under the Employee Plan, if the capital stock of PPI is changed by reason of
a stock split, reverse stock split, stock dividend or recapitalization, or
converted into or exchanged for other securities as a result of a merger,
consolidation or reorganization, appropriate adjustments will be made in (i) the
number and class of shares of PPI Class A Common Stock subject to the Employee
Plan and each outstanding option granted thereunder and (ii) the exercise price
of each outstanding option granted thereunder. Any such adjustment shall be
determined by the Employee Plan Committee in its sole discretion, which
determination shall be final and binding.
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CORPORATE TRANSACTIONS
The Employee Plan provides that new option rights may be substituted for
options granted thereunder, or PPI's obligations as to any such outstanding
options may be assumed, by an employer corporation other than PPI in connection
with any merger, consolidation, acquisition, separation, reorganization,
dissolution, liquidation, sale or other similar transaction in which PPI is
involved and which the Employee Plan Committee, or if there is no such
Committee, the PPI Board, determines, in its sole discretion, would materially
alter the structure of PPI. If there is a successor corporation and replacement
options are not granted by the successor corporation, all outstanding options
shall become exercisable prior to the consummation of such transaction.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
PURPOSE
The purpose of the Director Plan is to provide to the directors of PPI who
are not either employees or officers of PPI added incentive to continue in the
service of PPI and a more direct interest in the future success of the
operations of PPI by granting to such directors options to purchase shares of
PPI Common Stock. The effective date is January 1, 1997, provided that
shareholder approval of each Company is obtained.
ADMINISTRATION
Under the Director Plan, non-employee directors are divided into two groups.
The first group of non-employee directors consists of providers whose practice
of medicine is associated with an entity or organization for which PPI performs
management services ("affiliated directors"). The second group consists of
directors who are not affiliated directors ("non-affiliated directors").
The Director Plan shall administered by the PPI Board or a committee
thereof. The PPI Board shall have no authority, discretion or power to select
the non-affiliated directors who will receive options, to set the number of
shares to be covered by each option granted to a non-affiliated director, to set
the exercise price or the exercise period of a non-affiliated director's
options, or to alter any other terms or conditions specified herein applicable
to a non-affiliated director.
The PPI Board shall have the authority, discretion or power to select the
affiliated directors who receive options, to set the number of shares covered by
each affiliated director's options, to set the exercise price or exercise period
of an affiliated director's options, or to alter any other term or conditions
specified herein.
Each non-affiliated director serving PPI as a director on the effective date
of the Director Plan and on each grant date shall be granted, as of such date,
an option to purchase 7,500 shares of Common Stock. The PPI Board shall
determine the number of shares of PPI Common Stock subject to an option granted
to an affiliated director who is serving PPI on the effective date of the
Director Plan and on each grant date. If, on any January 1 during the term of
the Director Plan, the number of options scheduled to be granted to
non-affiliated directors is greater than the number of shares of PPI Common
Stock then available for grant on that date, the available shares shall be
allocated pro rata in determining the number of shares of PPI Common Stock to be
subject to each option to be granted to each such non-affiliated director on
such date.
SHARES AVAILABLE FOR GRANT OF OPTIONS
The total number of shares of PPI Common Stock as to which options may be
granted pursuant to the Director Plan shall be 100,000, except as such number of
shares shall be adjusted from time to time. If any outstanding option under the
Director Plan shall expire or be terminated or forfeited for any reason, the
shares of PPI Common Stock allocable to the unexercised portion of such option
may again be subject to
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the Director Plan. PPI shall, at all times during the life of any outstanding
option, retain as authorized and unissued PPI Common Stock at least such number
of shares as may be from time to time included in the outstanding options or
shall otherwise assure itself of its ability to perform its obligations under
the Director Plan.
ELIGIBILITY AND TERMS OF THE GRANT OF OPTIONS
To be eligible for an option, the optionee must be a member of the PPI Board
who is not an officer or an employee of PPI. The exercise price for each option
shall be the fair market value of PPI Common Stock on the date of grant. Each
director serving on the PPI Board shall be granted an option to purchase 7,500
shares of PPI Common Stock at an exercise price per share equal to the fair
market value of PPI Common Stock on the date of grant. Each optionee shall agree
to remain in the service of PPI, at the pleasure of PPI's stockholders, for a
continuous period of at least one year after the date of the grant of any
option, at the retainer rate then in effect or at such changed rate as PPI from
time to time may establish. Each option shall be exercisable as to one-third of
the shares subject to the option as of each of the first, second and third
anniversaries of the grant date of the option. There are four persons currently
eligible to participate in the class as non-employed directors.
EXERCISE OF OPTIONS AND PAYMENT
An optionee may exercise all or any portion of an option by providing
specified notice and making payment of the exercise price in cash, in
outstanding shares of PPI Class A Common Stock at their fair market value (as
determined by the PPI Board) or by delivery of vested options with a value equal
to the exercise price (the difference between the fair market value on the
exercise date of PPI Class A Common Stock subject to such option and the
exercise price thereof).
TAX CONSEQUENCES AND TRANSFERABILITY OF OPTIONS
The options available under the Director Plan are not qualified under
Section 422 of the Code. Consequently, on the granting of the options, the
company will not be entitled to a tax deduction; on receipt the recipient will
not recognize any income. On exercise the holder recognizes ordinary income in
an amount equal to the excess of the fair market value of the shares acquired
over the option price; the company is entitled to a corresponding deduction. PPI
shall have the right to withhold, or require an optionee to remit, an amount
needed to satisfy any applicable federal, state, local or foreign withholding
tax requirements. Options granted shall be exercisable only by the optionee or
the optionee's guardian or legal representative and may not be transferred other
than by will or by the laws of descent and distribution.
ADJUSTMENTS
In the event PPI shall effect a split of PPI Class A Common Stock or
dividend payable in PPI Class A Common Stock, or in the event the outstanding
PPI Class A Common Stock shall be combined into a smaller number of shares, the
maximum number of shares as to which options may be granted under the Director
Plan shall be increased or decreased proportionately. In the event that before
delivery by PPI of all of the shares of PPI Class A Common Stock in respect of
which any option has been granted under the Director Plan, PPI shall have
effected such a split, dividend or combination, the shares subject to the option
and the purchase price per share shall be increased or decreased proportionately
so that the aggregate purchase price for all the then optioned shares shall
remain the same as immediately prior to such split, dividend or combination.
In the event of a reclassification of PPI Class A Common Stock not covered
by the foregoing or in the event of a liquidation or reorganization, (including
a merger, consolidation or sale of assets of PPI), the PPI Board shall make such
adjustment, if any, as it may deem appropriate in the number, purchase price
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and kind of shares covered by the unexercised portions of options theretofore
granted under the Director Plan.
CORPORATE TRANSACTIONS
New option rights may be substituted for options granted, or PPI's
obligations as to outstanding options may be assumed, by an employer corporation
other than PPI, or an affiliate thereof, in connection with any merger,
consolidation, acquisition, separation, reorganization, dissolution,
liquidation, sale or similar transaction in which PPI is involved and which the
PPI Board determines, in its absolute discretion, would materially alter the
structure. However, if there is a successor corporation and replacement options
are not granted by the successor corporation, all outstanding options shall
become exercisable prior to the consummation of such transaction.
ADOPTION, AMENDMENT, SUSPENSION AND TERMINATION
The PPI Board may at any time amend, suspend or terminate the Director Plan,
provided that no such amendment, suspension or termination shall (i) impair any
options previously granted under the Director Plan or deprive any holder of any
shares of PPI Common Stock which such holder might have acquired through or as a
result of the Director Plan or (ii) be made without the approval of the
stockholders of PPI where such change would increase the total number of shares
of PPI Common Stock which may be granted under the Director Plan. If not sooner
terminated by the PPI Board, the Director Plan terminates at the close of
business on December 31, 2005.
NON-EMPLOYEE PROVIDER STOCK OPTION PLAN
PURPOSE
The Provider Plan was established to (i) furnish incentives to eligible
physicians chosen to receive options because they are considered capable of
responding by improving operations of PPI and increasing profits and (ii)
increase the interest of selected physicians in PPI's welfare through their
participation in the growth in value of PPI Class A Common Stock. The effective
date of the Provider Plan is December 31, 1996, provided that shareholder
approval of each Company is obtained.
ELIGIBLE PERSONS
Every person who is a non-employee provider affiliated with PPI or any
affiliate of PPI and certain non-employee providers subject to an acquisition or
management agreement with PPI are eligible to receive options. After the PC
Reorganization Transactions and the Merger approximately 300 providers will be
eligible to receive options under the Provider Plan.
ADMINISTRATION
The Provider Plan shall be administered by a committee (the "Provider Plan
Committee") of not less than three members appointed by the PPI Board (or if no
such committee has been formed, by the PPI Board). Currently, no Provider Plan
Committee has been constituted.
STOCK OPTION GRANTS
The number of shares of PPI Class A Common Stock that can be issued under
the Provider Plan shall not exceed an aggregate of 1,500,000 shares. If options
expire or are terminated for any reason prior to being exercised in full, the
remaining shares shall be available for future grants. Grants will be for non-
statutory stock options. All stock options granted shall be evidenced by written
agreements between PPI and the optionee that are consistent with the Provider
Plan. The purchase or exercise price shall be determined by the Provider Plan
Committee, or, if no such committee has been formed, by the PPI Board.
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<PAGE>
The exercise price shall not be less than 85% of the fair market value on the
date of grant (except that such exercise price for any person who owns, directly
or indirectly (or is treated as owning by reason of attribution rules currently
set forth in Section 424 of the Code), capital stock of PPI constituting more
than 10% of the total combined voting power of all classes of outstanding
capital stock of PPI or of any affiliate of PPI, shall in no event be less than
100% of such fair market value. The term of the option granted shall be fixed by
the Provider Plan Committee (or by the PPI Board if no such committee has been
formed), provided that no option shall be granted with a term more than 10
years. PPI shall not grant any options which may become exercisable at a rate in
excess of 20% per year from the date of such grant without the written consent
of a majority of the members of the Provider Plan Committee. Options are granted
in consideration for services rendered, or to be rendered, by the optionee.
PAYMENT
Payment of the exercise price, which shall be a price determined by the
Board of Directors but not less than the fair market value price of the PPI
Class A Common Stock, may be made in cash, or with the consent of the Provider
Plan Committee, with a full-recourse promissory note, shares of PPI Class A
Common Stock then valued at fair market value, any other property acceptable to
the Provider Plan Committee, or a combination of such forms of payment.
TRANSFERABILITY OF OPTIONS AND CESSATION OF AFFILIATION
During the lifetime of an optionee, only that optionee or the optionee's
guardian or legal representative may exercise an option. Options shall not be
assigned or transferred other than by will or the laws of descent and
distribution. In the event of termination of employment with an entity operating
under a management contract with PPI, the option will expire within 90 days of
cessation. In the event such termination of employment ceases by reason of
permanent disability or death, the optionee or the optionee's personal
representative would have the right to exercise the option within 12 months
after the date of cessation of employment.
TAX CONSEQUENCES AND TRANSFERABILITY OF OPTIONS
The options available under the Provider Plan are not qualified under
Section 422 of the Code. Consequently, on the granting of the options, PPI will
not be entitled to a tax deduction; on receipt the recipient will not recognize
any income. On exercise the holder recognizes ordinary income in an amount equal
to the excess of the fair market value of the shares acquired over the option
price; PPI is entitled to a corresponding deduction. PPI shall have the right to
withhold, or require an optionee to remit, an amount needed to satisfy any
applicable federal, state, local or foreign withholding tax requirements.
Options granted shall be exercisable only by the optionee or the optionee's
guardian or legal representative and may not be transferred other than by will
or by the laws of descent and distribution.
AMENDMENT AND TERMINATION
The PPI Board may at any time amend, alter, suspend or discontinue the
Provider Plan, provided that, with respect to outstanding options, the optionee
consents to such amendment.
CHANGES IN CAPITALIZATION
If the stock of PPI is altered by reason of a stock split, reverse stock
split, stock dividend or recapitalization, or converted into or exchanged for
other securities as a result of a merger, consolidation or reorganization,
appropriate adjustments shall be made in (i) the number and class of shares of
stock subject to the Provider Plan and each outstanding option and (ii) the
exercise price of each outstanding option (provided that PPI shall not be
required to issue fractional shares as a result of any such adjustment). Each
adjustment in option rights related to an alteration in PPI stock shall be
determined by
150
<PAGE>
the Provider Plan Committee, or if no such committee has been formed, by the PPI
Board, in its discretion, which determination shall be final and binding on all
persons.
CORPORATE TRANSACTIONS
New option rights may be substituted for options granted, or PPI's
obligations as to outstanding options may be assumed, by an employer corporation
other than PPI or an affiliate thereof, in connection with any merger,
consolidation, acquisition, separation, reorganization, dissolution,
liquidation, sale or similar transaction in which PPI is involved and which the
Provider Plan Committee determines, in its absolute discretion, would materially
alter the structure of PPI. If there is a successor corporation and replacement
options are not granted by the successor corporation, all outstanding options
shall become exercisable prior to the consummation of such transaction.
CHANGE IN CONTROL PLAN
PURPOSE
The Change in Control Plan was established to enable PPI and its
subsidiaries and affiliates (collectively, the "PPI ERISA Parties") to provide
severance benefits to eligible executive or management employees whose
employment is terminated following a Change in Control of PPI ERISA Parties. It
is the intent of PPI that the Change in Control Plan constitute an "employee
welfare benefit plan" within the meaning of Section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") and comply with the
applicable requirements of ERISA.
DEFINITION OF CHANGE IN CONTROL
For purposes of the Change in Control Plan, a "Change in Control" shall have
occurred if any of the following occur:
(a) any "Person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) other than PPI, any corporation owned, directly or
indirectly, by the stockholders of PPI in substantially the same proportions
as their ownership of stock in PPI, or any trustee or other fiduciary
holding securities under a company employee benefit plan or such
proportionately owned corporation, becomes the "beneficial owner" (as such
term is defined in rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of PPI representing 20% or more of the combined
voting power of PPI's then-outstanding securities;
(b) during any period of not more than 24 months, individuals who at the
beginning of such period constitute the PPI Board, and any new director
(other than a director designated by a Person who has entered into an
agreement with PPI to effect a transaction described in paragraphs (a), (c)
or (d) of this subsection) whose election was approved by a vote of at least
two-thirds of the directors then still in office, cease for any reason to
constitute at least a majority of the PPI Board;
(c) the stockholders of PPI approve a merger or consolidation of PPI
with any other entity or corporation, other than (i) a merger or
consolidation which would result in the voting securities of PPI outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 60% of the combined voting power of the voting securities
of PPI or such surviving entity outstanding immediately after such merger or
consolidation or (ii) a merger or consolidation effected to implement a
recapitalization of PPI (or similar transaction) in which no Person acquires
more than 20% of the combined voting power of PPI's then-outstanding
securities; or
(d) the stockholders of PPI approve a plan of complete liquidation of
PPI or an agreement for the sale or disposition by PPI of all or
substantially all of its assets (or any transaction having a similar
effect).
151
<PAGE>
PPI may also determine, in its discretion, that a sale of a substantial
portion of its assets or one of its businesses constitutes a "Change of Control"
with respect to any individual who may receive benefits under a Plan (a
"Participant") if the Participant is employed in the affected operation.
ADMINISTRATION
The Change in Control Plan shall be administered by a committee of the PPI
Board (the "Control Plan Committee") of not less than three members appointed by
the PPI Board, at least two of whom must be nonphysician disinterested directors
(the "Disinterested Directors") as defined under Rule 16b-3 ("Rule 16b-3")
promulgated under the Exchange Act, or if no such committee has been formed, by
the PPI Board.
PARTICIPATION
The Control Plan Committee shall designate from time to time those employees
of PPI employed in an executive or management position who shall participate in
the Change in Control Plan (a "Participant"). An employee who has been so
designated may participate by signing an agreement with PPI (a "Participation
Agreement"), which shall specify the benefits the Participant is entitled to
receive should the Participant's employment terminate following a Change in
Control of PPI and the terms and conditions under which those benefits will be
provided.
BENEFITS FOLLOWING A CHANGE IN CONTROL
If a Participant's employment with PPI terminates within 24 months following
a Change in Control, the Participant shall be entitled to the benefits specified
in the Participation Agreement.
NON-COMPETITION AND NON-SOLICITATION
In consideration for the benefits provided for under a Participant's
Agreement, the Participant shall agree that during the 24-month period following
the Participant's date of termination (the "Severance Period") such Participant
will comply with the non-competition and non-solicitation covenants set forth in
the Change in Control Plan. If a Participant fails to comply with the
non-competition covenant, the non-solicitation covenant or any covenant or
material condition in the Participation Agreement, participation in the Change
in Control Plan shall immediately terminate and the Participant shall forfeit
any remaining unpaid benefits.
FORM OF PAYMENT
Subject to the terms of a Participant's Agreement, benefits shall be paid in
equal installments according to PPI's normal payroll schedule. In the event of a
Participant's death before the Participant receives all benefits to which such
Participant otherwise would be entitled under the Change in Control Plan,
payment shall be made to the Participant's beneficiary in installments or a lump
sum, as determined by the Control Plan Committee, or if no such committee has
been formed, by the PPI Board.
OTHER EMPLOYMENT
A Participant shall not be required to act to mitigate the amount of any
payment or benefit provided for under the Change in Control Plan by seeking
other employment or otherwise, nor shall the amount of any payment or benefit
provided for under the Change in Control Plan be reduced by any compensation
earned by the Participant as a result of other employment.
152
<PAGE>
FEES AND EXPENSES
PPI shall pay all reasonable legal fees and related expenses (including the
reasonable costs of experts, evidence and counsel), when and as incurred by a
Participant, as a result of contesting or disputing any termination of
employment of the Participant following a Change in Control whether or not such
contest or dispute is resolved in the Participant's favor but only if the
Participant was seeking in good faith to obtain or enforce any right or benefit
provided by the Change in Control Plan or the Participant's Agreement.
WITHHOLDING AND TRANSFERABILITY OF BENEFITS
PPI shall have the right to withhold, or require a Participant to remit, an
amount needed to satisfy any applicable federal, state, local or foreign
withholding tax requirements. The interests of persons entitled to benefits
under the Change in Control Plan are not subject to their debts or other
obligations and, except as may be required by the tax withholding provisions of
the Code or any state's income tax act or pursuant to an agreement between a
Participant and PPI, may not be voluntarily sold, transferred, alienated,
assigned or encumbered.
AMENDMENT AND TERMINATION
PPI has the right to amend or terminate the Change in Control Plan at any
time, provided that no such amendment or termination of the Change in Control
Plan shall affect the provisions of any Participant's Agreement then in force
under the Change in Control Plan.
PLAN BENEFITS TO OFFICERS AND DIRECTORS
The following chart indicates the benefits available to certain executive
officers and to certain groups as a whole under the PPI Incentive Compensation
Plans:
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
NUMBER OF OPTIONS NUMBER OF OPTIONS UNDER NUMBER OF OPTIONS UNDER
UNDER EMPLOYEE STOCK NON-EMPLOYEE DIRECTOR NON-EMPLOYEE PROVIDER
NAME AND POSITION OPTION PLAN STOCK OPTION PLAN STOCK OPTION PLAN
- --------------------------------------- -------------------- ------------------------- -------------------------
<S> <C> <C> <C>
David M. Goldberg, M.H.A. .............
President and Chief Executive
Officer, Director 50,000 -- --
Michael F. Bonazzola, M.D., ...........
Senior Vice President and Chief
Medical Officer, Director -- -- --
Tim E. Dupell, C.P.A. .................
Senior Vice President and Chief
Financial Officer, Director 35,000 -- --
Jerald Erstgaard ......................
Senior Vice President 35,000 -- --
David Kobriger ........................
Senior Vice President 35,000 -- --
Jon Ness ..............................
Senior Vice President 35,000 -- --
Executive Group........................ 190,000 -- --
Non-Executive Director Group........... -- 7,500 --
</TABLE>
153
<PAGE>
SHAREHOLDER APPROVAL AND BOARD RECOMMENDATION
The shareholders of each Company must approve the PPI Incentive Compensation
Plans. The affirmative vote of two-thirds of the outstanding shares of each of
Corvallis Clinic Class A Stock and Corvallis Class B Stock, in each case as a
voting group, present in person or represented by proxy at the Corvallis Clinic
Special Meeting is required for Corvallis Clinic to approve the PPI Incentive
Compensation Plans. The affirmative vote of a majority of the outstanding
HealthFirst Class A Shares present in person or by proxy at the HealthFirst
Special Meeting is required for HealthFirst to approve the PPI Incentive
Compensation Plans. The affirmative vote of a majority of the outstanding shares
of Medford Clinic Common Stock present in person or represented by proxy at the
Medford Clinic Special Meeting is required for Medford Clinic to approve the PPI
Incentive Compensation Plans. If such approvals are obtained, each PPI Incentive
Compensation Plan will become effective as of the Effective Time. If, however,
all of such shareholder approvals are not obtained for this Proposal, none of
the PPI Incentive Compensation Plans will become effective.
Each of the HealthFirst Board, the Corvallis Clinic Board and the Medford
Clinic Board believes that it is in the best interests of their respective
Companies to approve the PPI Incentive Compensation Plans, which provide a
meaningful opportunity for officers, employees, non-employee directors and
physicians employed by entities with which PPI has entered into a practice
management agreement to acquire a substantial propriety interest in PPI and to
more closely align their interests to those of other stockholders of PPI.
ACCORDINGLY, THE HEALTHFIRST BOARD UNANIMOUSLY RECOMMENDS APPROVAL OF THE PPI
INCENTIVE COMPENSATION PLANS PROPOSAL. THE CORVALLIS CLINIC BOARD UNANIMOUSLY
RECOMMENDS APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL. THE
MEDFORD CLINIC BOARD UNANIMOUSLY RECOMMENDS APPROVAL OF THE PPI INCENTIVE
COMPENSATION PLANS PROPOSAL.
FUTURE SHAREHOLDER PROPOSALS
If the Merger is consummated, the first annual meeting of the stockholders
of PPI after such consummation is expected to be held on or about May 9, 1997.
If the Merger is not consummated, the 1997 Annual Meeting of Shareholders of
HealthFirst is expected to be held on or about September 8, 1997, the 1997
Annual Meeting of Shareholders of Corvallis Clinic is expected to be held on or
about March 10, 1997 and the 1997 Annual Meeting of Shareholders of Medford
Clinic is expected to be held on or about January 11, 1997.
Subject to the foregoing, if any PPI stockholder intends to present a
proposal at the 1997 Annual Meeting of Stockholders of PPI and wishes to have
such proposal considered for inclusion in the proxy materials for such meeting,
such holder must submit the proposal to the Secretary of PPI in writing so as to
be received at the principal executive offices of PPI by January 9, 1997. Such
proposals must also meet the other requirements of the rules of the SEC relating
to stockholders' proposals. In the event the Merger is not consummated, the only
shareholder proposals eligible to be considered for inclusion in the proxy
materials for the 1997 Annual Meeting of Shareholders of HealthFirst will be
those which have been duly submitted to the Secretary of HealthFirst by April
11, 1997. The only shareholder proposals eligible to be considered for inclusion
in the proxy materials for the 1997 Annual Meeting of Shareholders of
HealthFirst will be those which have been duly submitted to the Secretary of
Corvallis Clinic by November 10, 1996. The only shareholder proposals eligible
to be considered for inclusion in the proxy materials for the 1997 Annual
Meeting of Shareholders of HealthFirst will be those which have been duly
submitted to the Secretary of Medford Clinic by September 13, 1996.
EXPERTS
The financial statements included in this Joint Proxy Statement/Prospectus,
to the extent and for the periods indicated in such financial statements, have
been audited by Arthur Andersen LLP, independent
154
<PAGE>
public accountants, as indicated in their reports in respect of such financial
statements and are included herein in reliance upon the authority of said firm
as such experts in giving such reports.
The PPI valuation report referenced in this Joint Proxy Statement/Prospectus
has been prepared by American Appraisal Associates, Inc. and is available for
inspection and copying at the principal executive offices of PPI during its
regular business hours by any stockholder of the Companies.
LEGAL MATTERS
McDermott, Will & Emery, counsel to PPI and each of the Companies, will
issue a legal opinion to each of HealthFirst, Corvallis Clinic and Medford
Clinic regarding certain federal income tax consequences of the Merger. Douglas
Mancino is a partner of McDermott, Will & Emery and is also a member of the PPI
Board who holds PPI Class A Common Stock which, at the Effective Time, will
represent less than one percent of the outstanding PPI Class A Common Stock.
155
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
I. PHYSICIAN PARTNERS, INC.:
Report of Independent Public Accountants............................................. F-1
Balance Sheet as of June 30, 1996.................................................... F-2
Statement of Operations for the period from inception (June 20, 1996) to June 30,
1996............................................................................... F-3
Statement of Stockholders' Equity for the period from inception (June 20, 1996) to
June 30, 1996...................................................................... F-4
Statement of Cash Flows for the period from inception (June 20, 1996) to June 30,
1996............................................................................... F-5
Notes to Financial Statements........................................................ F-6
II. PHYSICIAN PARTNERS, INC.--PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED):
Headnote............................................................................. F-9
Unaudited Pro Forma Condensed Balance Sheet as of June 30, 1996...................... F-10
Unaudited Pro Forma Condensed Statements of Operations for the three years ended
December 31, 1995 and the six months ended June 30, 1996........................... F-11
Notes to Unaudited Pro Forma Condensed Financial Statements.......................... F-15
III. HEALTHFIRST MEDICAL GROUP, P.C.:
HEALTHFIRST MEDICAL GROUP, P.C.:
Report of Independent Public Accountants............................................. F-17
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996.................... F-18
Statements of Operations for the three years ended December 31, 1995 and the six
months ended June 30, 1995 and 1996................................................ F-20
Statements of Stockholders' Equity for the three years ended December 31, 1995 and
the six months ended June 30, 1996................................................. F-21
Statements of Cash Flows for the three years ended December 31, 1995 and the six
months ended June 30, 1995 and 1996................................................ F-22
Notes to Financial Statements........................................................ F-24
HEALTHFIRST MEDICAL GROUP, P.C.--ACQUISITION
(THE SUBURBAN MEDICAL CLINIC, INC.):
Report of Independent Public Accountants............................................. F-37
Balance Sheets as of December 31, 1994 and 1995...................................... F-38
Statements of Operations for the three years ended December 31, 1995 and the six
months ended June 30, 1995......................................................... F-39
Statements of Stockholders' Equity for the three years ended December 31, 1995 and
the six months ended June 30, 1995................................................. F-40
Statements of Cash Flows for the three years ended December 31, 1995 and the six
months ended June 30, 1995......................................................... F-41
Notes to Financial Statements........................................................ F-42
IV. THE CORVALLIS CLINIC, P.C.:
THE CORVALLIS CLINIC, P.C.
Report of Independent Public Accountants............................................. F-53
Balance Sheets as of November 30, 1994 and 1995 and June 30, 1996.................... F-54
Statements of Operations for the three years ended November 30, 1995 and the seven
months ended June 30, 1995 and 1996................................................ F-55
Statements of Accumulated Deficit for the three years ended November 30, 1995 and the
seven months ended June 30, 1996................................................... F-56
Statements of Cash Flows for the three years ended November 30, 1995 and the seven
months ended June 30, 1995 and 1996................................................ F-57
Notes to Financial Statements........................................................ F-58
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
THE CORVALLIS CLINIC, P.C.--SIGNIFICANT INVESTMENT
INTEREST (CORVALLIS MRI):
Report of Independent Public Accountants............................................. F-73
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996.................... F-74
Statements of Operations for the three years ended December 31, 1995 and the six
months ended June 30, 1995 and 1996................................................ F-75
Statements of Partners' Equity for the three years ended December 31, 1995 and the
six months ended June 30, 1996..................................................... F-76
Statements of Cash Flows for the three years ended December 31, 1995 and the six
months ended June 30, 1995 and 1996................................................ F-77
Notes to Financial Statements........................................................ F-78
V. MEDFORD CLINIC, P.C.:
Report of Independent Public Accountants............................................. F-81
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996.................... F-82
Statements of Operations for the three years ended December 31, 1995 and the six
months ended June 30, 1995 and 1996................................................ F-83
Statements of Stockholders' Equity for the three years ended December 31, 1995 and
the six months ended June 30, 1996................................................. F-84
Statements of Cash Flows for the three years ended December 31, 1995 and the six
months ended June 30, 1995 and 1996................................................ F-85
Notes to Financial Statements........................................................ F-87
VI. SUPPLEMENTARY SCHEDULES:
SCHEDULES OF CHANGES IN THE ALLOWANCES FOR CONTRACTUAL DISCOUNTS AND UNCOLLECTIBLE
ACCOUNTS
Report of Independent Public Accountants............................................. F-97
HealthFirst Medical Group, P.C....................................................... F-98
The Suburban Medical Clinic, Inc..................................................... F-99
The Corvallis Clinic, P.C............................................................ F-100
Corvallis MRI........................................................................ F-101
Medford Clinic, P.C.................................................................. F-102
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Physician Partners, Inc.:
We have audited the accompanying balance sheet of Physician Partners, Inc.
(a Delaware corporation) as of June 30, 1996, and the related statements of
operations, stockholders' equity and cash flows for the period from inception to
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Physician Partners, Inc. as
of June 30, 1996, and the results of its operations and its cash flows for the
period from inception to June 30, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
September 16, 1996
F-1
<PAGE>
PHYSICIAN PARTNERS, INC.
BALANCE SHEET AS OF JUNE 30, 1996
ASSETS
<TABLE>
<S> <C>
ASSETS:
Stock subscriptions receivable................................................. $ 3,000
---------
Total assets................................................................. $ 3,000
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES...................................................................... $ --
STOCKHOLDERS' EQUITY:
Preferred stock--$0.01 par value; 50,000,000 shares authorized; no shares
issued or outstanding........................................................ --
Common stock--
Class A--Voting; $0.01 par value; 20,000,000 shares authorized; 3,000 shares
issued and outstanding..................................................... 30
Class B--Voting; $0.01 par value; 30,000,000 shares authorized; no shares
issued or outstanding...................................................... --
Additional paid in capital..................................................... 699,609
Accumulated deficit............................................................ (696,639)
---------
Total stockholders' equity................................................... 3,000
---------
Total liabilities and stockholders' equity................................... $ 3,000
---------
---------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-2
<PAGE>
PHYSICIAN PARTNERS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO JUNE 30, 1996
<TABLE>
<S> <C>
REVENUES......................................................................... $ --
---------
REORGANIZATION COSTS............................................................. 696,639
---------
Operating loss................................................................. (696,639)
OTHER INCOME (EXPENSE)........................................................... --
---------
Net loss before income taxes................................................... (696,639)
---------
INCOME TAX BENEFIT............................................................... --
---------
NET LOSS......................................................................... $(696,639)
---------
---------
LOSS PER SHARE................................................................... $ 232
---------
---------
NUMBER OF SHARES USED IN LOSS PER SHARE CALCULATION.............................. 3,000
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
PHYSICIAN PARTNERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO JUNE 30, 1996
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK
------------------------
ADDITIONAL
NUMBER PAID IN ACCUMULATED
OF SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, June 20, 1996 (inception)...... -- $ -- $ -- $ -- $ --
Issuance of common stock.............. 3,000 30 2,970 -- 3,000
Reorganization costs incurred by
Founding Clinics.................... -- -- 696,639 -- 696,639
Net loss.............................. -- -- -- (696,639) (696,639)
----- ----- ----------- ----------- ---------
BALANCE, June 30, 1996.................. 3,000 $ 30 $ 699,609 $(696,639) $ 3,000
----- ----- ----------- ----------- ---------
----- ----- ----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
PHYSICIAN PARTNERS, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO JUNE 30, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $(696,639)
Reorganization costs incurred by Founding Clinics.............................. 696,639
---------
Net cash from operating activities........................................... --
CASH FLOWS FROM INVESTING ACTIVITIES............................................. --
---------
Net cash from investing activities........................................... --
---------
CASH FLOWS FROM FINANCING ACTIVITIES............................................. --
---------
Net cash from financing activities........................................... --
---------
NET CHANGE IN CASH............................................................... --
CASH, beginning of period........................................................ --
---------
CASH, end of period.............................................................. $ --
---------
---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest......................................................... $ --
Cash paid for income taxes..................................................... --
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock subscriptions receivable issued for common stock......................... $ 3,000
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
1. BUSINESS AND ORGANIZATION:
Physician Partners, Inc. (PPI), is a Delaware corporation formed on June 20,
1996 for the purpose of effecting a reorganization transaction between PPI and
HealthFirst Medical Group, PC., The Corvallis Clinic, PC. and The Medford
Clinic, PC., (collectively, The Founding Clinics).
This transaction would result in a separation of operations of the three
Founding Clinics between medical professional services activities (i.e.,
providers of medical services) and the physician practice management activities
of the business. The professional services activities would be spun off into
newly formed professional corporations (New PCs). The physician practice
management business, along with substantially all of the assets and liabilities
of the three Founding Clinics, i.e., accounts receivable, property, plant,
equipment, contracts, payables, accruals and debt, would be transferred to PPI.
When the transaction becomes effective, the stockholders of the existing
Founding Clinics will become the original stockholders of PPI.
An integral part of the reorganization is a 40-year management agreement
whereby PPI would provide physician practice management services to the New PCs.
Services to be provided would include management and administrative services,
capital resources, facilities, equipment and supplies.
As consideration, PPI would be entitled to (a) reimbursement of all
managerial costs and expenses (Manager's Expenses) incurred by PPI and (b) a
management fee equal to 16 percent of the Distributable Profit Amount (defined
as (i) gross revenues, booked on an accrual basis, less contractual allowances
and bad debts, received by PPI or the New PCs relating to services provided by
the New PCs less (ii) Manager's Expense).
The New PCs would be responsible for providing medical services and the
related costs for provider compensation and benefits.
2. REORGANIZATION COSTS:
The Founding Clinics have incurred costs of $696,639 related to the
reorganization transaction through June 30, 1996. These costs have been treated
as expenses in the accompanying financial statements with a contra credit to
paid-in capital.
Costs to be incurred between June 30, 1996 and the effective date of the
reorganization transaction are estimated to be approximately $2.8 million and
will be accounted for in the PPI financial statements in the same manner as the
costs incurred to date.
3. LOSS PER SHARE:
The loss per share was computed by dividing net losses by the weighted
average number of common shares outstanding during the period.
4. SUBSEQUENT EVENTS:
REORGANIZATION TRANSACTION
On July 29, 1996, the Board of Directors of each party approved the
reorganization plan described in Note 1 subject to the approval of the
stockholders of the three Founding Clinics.
F-6
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
4. SUBSEQUENT EVENTS: (CONTINUED)
EMPLOYMENT AGREEMENTS
In anticipation of the consummation of the reorganization transaction,
various individuals have entered into Employment Agreements with PPI which
provide for base compensation, incentive bonuses, stock options and restricted
stock awards, termination benefits and, in certain cases, severance compensation
in the event the transaction is not consummated prior to January 31, 1997. The
stock options will be granted when the reorganization and merger become
effective. The restricted stock awards will be granted during the third quarter
of 1996. A summary of these Employment Agreements follows:
Restricted stock awards aggregating 108,000 shares of PPI Class A common
stock would be granted. One-third of the shares will vest at the first,
second and third anniversaries of the effective date of the merger. Shares
issued will be recorded at their fair market value on the date of grant with
a corresponding charge to stockholders' equity representing the unearned
portion of the awards. The unearned portion will be amortized as
compensation expense on a straight-line basis over the related vesting
period.
Stock options would be granted for 225,000 shares of PPI Class A common
stock. The exercise price will be the fair market value of the shares at the
date of grant. These options will vest and become exercisable at a rate of
20 percent on each anniversary date of the grant.
In the event the merger fails to occur on or before January 31, 1997,
PPI would be obligated to pay severance costs to certain of these
individuals in an aggregate amount of $475,000 to $640,000. Other
termination benefits would also be required such as health and disability
insurance and indemnification of any losses related to the executives'
primary residences.
The obligations of PPI under certain of these agreements are guaranteed by
the three Founding Clinics.
STOCK OPTION PLANS
The reorganization plan will include a proposal to establish various stock
option plans for PPI employees and directors, as well as providers employed by
the New PCs. These plans would reserve a total of 2,500,000 options for PPI
Class A common stock. This includes the options for the 225,000 shares covered
by the Employment Agreements discussed above.
F-7
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
4. SUBSEQUENT EVENTS: (CONTINUED)
LEASE COMMITMENTS
On August 28, 1996, the Company entered into a seven year lease for office
space. Future minimum rental payments under this lease are as follows:
<TABLE>
<S> <C>
1996...................................................... $ 21,953
1997...................................................... 87,810
1998...................................................... 87,810
1999...................................................... 87,810
2000...................................................... 87,810
Thereafter................................................ 241,477
---------
Total................................................... $ 614,670
---------
---------
</TABLE>
STOCK SUBSCRIPTIONS RECEIVABLE
Proceeds from the stock subscriptions receivable have been received
subsequent to June 30, 1996.
F-8
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
As explained elsewhere in this Joint Proxy Statement/Prospectus, the PC
Reorganization Transactions would result in a division of the current businesses
of HealthFirst Medical Group, P.C., The Corvallis Clinic, P.C. and Medford
Clinic, P.C.
Various business support functions along with substantially all of the
assets and liabilities of the three existing Companies would be transferred to
PPI in exchange for PPI Class A Common Stock. Under accounting rules prescribed
by the staff of the Securities and Exchange Commission in SAB 48, when a company
acquires assets from promoters and shareholders in exchange for stock just prior
to, or at the time of, its first public offering, such assets should generally
be recorded at the cost to each such promoter or shareholder. Each of the three
existing Companies is involved as a promoter of the Merger and the related
first-time public registration of stock of PPI. Accordingly, the assets and
liabilities to be transferred from the Companies to PPI in connection with the
merger transactions will be recorded on the PPI balance sheet in the same
amounts as reflected on the balance sheets of the Companies at the effective
date of the merger and the PPI stock will be valued at the historic cost of the
net assets to be transferred.
The medical practice (i.e., physicians and medical service staff) would be
"spun off" to New PCs. The New PCs would then enter into Management Agreements
with PPI for various management, finance and administrative support services.
PPI revenues under the Management Agreements would include (a) reimbursement of
all Manager's Expenses plus (b) a management fee equal to 16% of the
Distributable Profit Amount of the New PCs. "Distributable Profit Amount" is
defined as (i) New PC gross revenues, booked on an accrual basis, less specified
contractual discounts and bad debts, relating to services provided by the New
PCs, less (ii) Manager's Expenses.
The amount available for provider compensation and benefits will be directly
effected by the amount of the management fee to be paid to PPI. Although the
impact can not be determined at this time, the amount available for provider
compensation and benefits may also be effected by merger synergies and
management's ability to reduce costs or enhance revenues.
The pro forma financial statements include the unaudited pro forma condensed
balance sheet of PPI as of June 30, 1996 and the unaudited pro forma condensed
statements of operations of PPI for the years ended December 31, 1993, 1994 and
1995 and for the six months ended June 30, 1996.
The unaudited condensed pro forma financial statements illustrate the
balance sheet of PPI as if the PC Reorganization Transactions and the Merger had
occurred on June 30, 1996. The unaudited condensed pro forma statements of
operations illustrate the operating results of PPI for the periods presented as
if the PC Reorganization Transactions and the Merger had occurred and the
Management Agreements were in effect throughout the periods presented.
The unaudited condensed pro forma financial statements have been prepared by
PPI based on the historical financial statements of PPI and the Companies and
their predecessors included elsewhere in this Joint Proxy Statement/Prospectus
and assumptions deemed appropriate by PPI. These unaudited condensed pro forma
financial statements may not be indicative of actual results if the transactions
contemplated by the Reorganization and Merger Agreement had occurred on the
dates indicated or which may be realized in the future. Neither expected
benefits and cost reductions anticipated nor future corporate costs of PPI have
been reflected in the accompanying unaudited condensed pro forma financial
statements.
F-9
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1996
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST CORVALLIS
--------- ------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments................. $ -- $ 3,560 $ 71
Accounts receivable--
Gross accounts receivable..................... 3 10,482 8,548
Reserves...................................... -- (2,036) (2,627)
--------- ------------- -------------
Receivable, net............................. 3 8,446 5,921
Other current assets............................ -- 367 332
--------- ------------- -------------
Total current assets........................ 3 12,373 6,324
PROPERTY, PLANT AND EQUIPMENT:
Gross property.................................. -- 24,696 27,869
Accumulated depreciation........................ -- (4,977) (8,426)
--------- ------------- -------------
Property, plant and equipment, net.......... -- 19,719 19,443
Other noncurrent assets......................... -- 367 960
--------- ------------- -------------
Total assets................................ $ 3 $ 32,459 $ 26,727
--------- ------------- -------------
--------- ------------- -------------
CURRENT LIABILITIES:
Accounts and notes payable...................... $ -- $ 1,722 $ 985
Other current liabilities....................... -- 13,193 7,108
--------- ------------- -------------
Total current liabilities................... -- 14,915 8,093
LONG-TERM DEBT, net of current portion............ -- 4,160 554
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS,
net of current portion.......................... -- 4,470 14,098
OTHER LONG-TERM LIABILITIES....................... -- 3,867 1,960
REDEEMABLE STOCK.................................. -- -- 6,486
STOCKHOLDERS' EQUITY:
Common stock.................................... -- 906 --
Additional paid-in capital...................... 700 122 --
Retained earnings (deficit)..................... (697) 4,019 (4,464)
--------- ------------- -------------
Total liabilities and equity................ $ 3 $ 32,459 $ 26,727
--------- ------------- -------------
--------- ------------- -------------
<CAPTION>
MEDFORD ADJUSTMENTS PPI PRO FORMA
------------- ------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments................. $ 2,086 $ -- $ 5,717
Accounts receivable--
Gross accounts receivable..................... 10,485 -- 29,518
Reserves...................................... (3,124) -- (7,787)
------------- ------------- -------------
Receivable, net............................. 7,361 -- 21,731
Other current assets............................ 542 -- 1,241
------------- ------------- -------------
Total current assets........................ 9,989 -- 28,689
PROPERTY, PLANT AND EQUIPMENT:
Gross property.................................. 10,500 -- 63,065
Accumulated depreciation........................ (4,835) -- (18,238)
------------- ------------- -------------
Property, plant and equipment, net.......... 5,665 -- 44,827
Other noncurrent assets......................... 301 -- 1,628
------------- ------------- -------------
Total assets................................ $ 15,955 $ -- $ 75,144
------------- ------------- -------------
------------- ------------- -------------
CURRENT LIABILITIES:
Accounts and notes payable...................... $ 790 $ -- $ 3,497
Other current liabilities....................... 6,812 -- 27,113
------------- ------------- -------------
Total current liabilities................... 7,602 -- 30,610
LONG-TERM DEBT, net of current portion............ 4,437 -- 9,151
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS,
net of current portion.......................... -- -- 18,568
OTHER LONG-TERM LIABILITIES....................... 597 -- 6,424
REDEEMABLE STOCK.................................. -- (6,486)(A) --
STOCKHOLDERS' EQUITY:
Common stock.................................... 1 (842)(A) 65
Additional paid-in capital...................... -- 10,201(A) 11,023
Retained earnings (deficit)..................... 3,318 (2,873)(A) (697)
------------- ------------- -------------
Total liabilities and equity................ $ 15,955 $ -- $ 75,144
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-10
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST SUBURBAN CORVALLIS
--------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(HH)
NET REVENUES.............................. $ -- $ 28,707 $ 1,232 $ 24,029
Less--Provider compensation and
benefits.............................. -- 12,426 373 6,342
--------- ------------- ------ -------------
Net revenues less provider
compensation and benefits......... -- 16,281 859 17,687
TOTAL OPERATING EXPENSES.................. -- 20,248 1,238 17,375
OTHER (INCOME) EXPENSES................... -- (74) (11) 382
REORGANIZATION COSTS...................... 697 -- -- --
--------- ------------- ------ -------------
Income (loss) before income taxes... (697) (3,893) (368) (70)
INCOME TAX (BENEFIT) EXPENSE.............. -- (1,348) -- --
--------- ------------- ------ -------------
Net income (loss)................... $ (697) $ (2,545) $ (368) $ (70)
--------- ------------- ------ -------------
--------- ------------- ------ -------------
<CAPTION>
MEDFORD SUBTOTAL ADJUSTMENTS PPI PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(II)
NET REVENUES.............................. $ 20,506 $ 74,474 $ (74,474)(AA) $ 56,753
56,753(BB)
Less--Provider compensation and
benefits.............................. 5,709 24,850 (24,850)(CC) --
------------- ------------- ------------- -------------
Net revenues less provider
compensation and benefits......... 14,797 49,624 7,129 56,753
TOTAL OPERATING EXPENSES.................. 14,087 52,948 -- 52,948
OTHER (INCOME) EXPENSES................... 133 430 34(DD) 464
REORGANIZATION COSTS...................... -- 697 (697)(EE) --
------------- ------------- ------------- -------------
Income (loss) before income taxes... 577 (4,451) 7,792 3,341
1,336(FF)
INCOME TAX (BENEFIT) EXPENSE.............. 231 (1,117) 1,117(GG) 1,336
------------- ------------- ------------- -------------
Net income (loss)................... $ 346 $ (3,334) $ 5,339 $ 2,005
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-11
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST SUBURBAN CORVALLIS
--------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(HH)
NET REVENUES.............................. $ -- $ 37,652 $ 15,418 $ 39,174
Less--Provider compensation and
benefits.............................. -- 9,530 3,916 13,209
--------- ------------- ------------- -------------
Net revenues less provider
compensation and benefits......... -- 28,122 11,502 25,965
TOTAL OPERATING EXPENSES.................. -- 27,593 12,770 27,779
OTHER (INCOME) EXPENSES................... -- 29 185 293
--------- ------------- ------------- -------------
Income (loss) before income taxes... -- 500 (1,453) (2,107)
INCOME TAX (BENEFIT) EXPENSE.............. -- 208 (610) --
--------- ------------- ------------- -------------
Net income (loss)................... $ -- $ 292 $ (843) $ (2,107)
--------- ------------- ------------- -------------
--------- ------------- ------------- -------------
<CAPTION>
MEDFORD SUBTOTAL ADJUSTMENTS PPI PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(II)
NET REVENUES.............................. $ 38,966 $ 131,210 $ (131,210)(AA) $ 101,059
101,059(BB)
Less--Provider compensation and
benefits.............................. 11,239 37,894 (37,894)(CC) --
------------- ------------- ------------- -------------
Net revenues less provider
compensation and benefits......... 27,727 93,316 7,743 101,059
TOTAL OPERATING EXPENSES.................. 26,277 94,419 -- 94,419
OTHER (INCOME) EXPENSES................... 390 897 68(DD) 965
------------- ------------- ------------- -------------
Income (loss) before income taxes... 1,060 (2,000) 7,675 5,675
2,270(FF)
INCOME TAX (BENEFIT) EXPENSE.............. 408 6 (6)(GG) 2,270
------------- ------------- ------------- -------------
Net income (loss)................... $ 652 $ (2,006) $ 5,411 $ 3,405
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-12
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST SUBURBAN CORVALLIS
--------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(HH)
NET REVENUES.............................. $ -- $ 32,276 $ 14,694 $ 35,344
Less--Provider compensation and
benefits.............................. -- 8,376 3,514 13,729
--------- ------------- ------------- -------------
Net revenues less provider
compensation and benefits......... -- 23,900 11,180 21,615
TOTAL OPERATING EXPENSES.................. -- 20,648 10,589 22,334
OTHER (INCOME) EXPENSES................... -- (101) (55) 558
--------- ------------- ------------- -------------
Income (loss) before income taxes... -- 3,353 646 (1,277)
INCOME TAX (BENEFIT) EXPENSE.............. -- 1,416 263 --
--------- ------------- ------------- -------------
Net income (loss)................... $ -- $ 1,937 $ 383 $ (1,277)
--------- ------------- ------------- -------------
--------- ------------- ------------- -------------
<CAPTION>
MEDFORD SUBTOTAL ADJUSTMENTS PPI PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(II)
NET REVENUES.............................. $ 32,327 $ 114,641 $ (114,641)(AA) $ 82,793
82,793(BB)
Less--Provider compensation and
benefits.............................. 9,248 34,867 (34,867)(CC) --
------------- ------------- ------------- -------------
Net revenues less provider
compensation and benefits......... 23,079 79,774 3,019 82,793
TOTAL OPERATING EXPENSES.................. 22,457 76,028 -- 76,028
OTHER (INCOME) EXPENSES................... 297 699 68(DD) 767
------------- ------------- ------------- -------------
Income (loss) before income taxes... 325 3,047 2,951 5,998
2,399(FF)
INCOME TAX (BENEFIT) EXPENSE.............. 133 1,812 (1,812)(GG) 2,399
------------- ------------- ------------- -------------
Net income (loss)................... $ 192 $ 1,235 $ 2,364 $ 3,599
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-13
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST SUBURBAN CORVALLIS
--------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(HH)
NET REVENUES.............................. $ -- $ 24,398 $ 13,197 $ 29,939
Less--Provider compensation and
benefits.............................. -- 6,278 3,294 7,122
--------- ------------- ------------- -------------
Net revenues less provider
compensation and benefits......... -- 18,120 9,903 22,817
TOTAL OPERATING EXPENSES.................. -- 15,963 10,173 20,159
OTHER (INCOME) EXPENSES................... -- (46) (23) 719
--------- ------------- ------------- -------------
Income (loss) before income taxes... -- 2,203 (247) 1,939
INCOME TAX (BENEFIT) EXPENSE.............. -- 889 (99) 759
--------- ------------- ------------- -------------
Net income (loss)................... $ -- $ 1,314 $ (148) $ 1,180
--------- ------------- ------------- -------------
--------- ------------- ------------- -------------
<CAPTION>
MEDFORD SUBTOTAL ADJUSTMENTS PPI PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(II)
NET REVENUES.............................. $ 23,074 $ 90,608 $ (90,608)(AA) $ 67,318
67,318(BB)
Less--Provider compensation and
benefits.............................. 7,009 23,703 (23,703)(CC) --
------------- ------------- ------------- -------------
Net revenues less provider
compensation and benefits......... 16,065 66,905 413 67,318
TOTAL OPERATING EXPENSES.................. 15,805 62,100 -- 62,100
OTHER (INCOME) EXPENSES................... 132 782 68(DD) 850
------------- ------------- ------------- -------------
Income (loss) before income taxes... 128 4,023 345 4,368
1,747(FF)
INCOME TAX (BENEFIT) EXPENSE.............. 44 1,593 (1,593)(GG) 1,747
------------- ------------- ------------- -------------
Net income (loss)................... $ 84 $ 2,430 $ 191 $ 2,621
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-14
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The pro forma condensed balance sheet has been presented as if the proposed
reorganization transaction had taken place on June 30, 1996.
The pro forma condensed statements of operations have been presented as if
the proposed reorganization had taken place and that the proposed Management
Agreement was in effect throughout the periods presented.
ADJUSTMENTS TO PRO FORMA BALANCE SHEET
Under accounting rules prescribed by the staff of the Securities and
Exchange Commission in SAB 48, when a company acquires assets from promoters and
shareholders in exchange for stock just prior to, or at the time of, its first
public offering, such assets should generally be recorded at the cost to each
such promoter or shareholder. Each of the three existing Companies is involved
as a promoter of the Merger and the related first-time public registration of
stock of PPI. Accordingly, the assets and liabilities to be transferred from the
Companies to PPI in connection with the merger transactions will be recorded on
the PPI balance sheet in the same amounts as reflected on the balance sheets of
the Companies at the effective date of the merger and the PPI stock will be
valued at the historic cost of the net assets to be transferred.
(A) The adjustments reflect the effect of the reorganization transaction on
the shareholders' equity accounts which includes the issuance of 6,500,250
shares of PPI common stock in exchange for all classes of the stock of the
three clinics. These PPI shares will be recorded at par value of $.01 per
share and all of the remaining balances in the three clinics capital
accounts will be reflected as paid-in-capital.
ADJUSTMENTS TO PRO FORMA STATEMENTS OF OPERATIONS
The unaudited condensed pro forma statements of operations reflect the
following adjustments:
(AA) Represents the elimination of revenues relating to medical services to be
provided by the New PCs.
(BB) Represents the revenues to be generated by PPI under the terms of the
Management Agreement.
(CC) Eliminates the previously recorded provider compensation and benefits of
the participating clinics. Under the terms of the merger and
reorganization, the medical practice would be spun off to the New PCs. The
New PCs would be responsible for the costs related to provider
compensation and benefits. The amount available for provider compensation
and benefits will be directly effected by the amount of the management fee
to be paid to PPI. Although the impact can not be determined at this time,
the amount available for provider compensation and benefits may also be
effected by merger synergies and management's ability to reduce costs or
enhance revenues.
(DD) Represents the pro forma impact of compensation expense related to
restricted stock awards issued by PPI.
(EE) Eliminates the impact on operations of nonrecurring costs incurred in
connection with the reorganization transaction. Substantially all of these
costs are related to services from accountants, attorneys and other
consultants to provide legal documents, accounting and other information
required for the reorganization and merger transaction. Additional
reorganization and merger costs of approximately $2.8 million are expected
to be incurred between June 30, 1996 and the
F-15
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
effective date of the merger. Such costs have not been reflected in the pro
forma financial statements.
(FF) The pro forma income taxes of PPI at an estimated 40% combined federal and
state tax rate.
(GG) Represents the elimination of previously recorded income tax provision
(benefit) of the participating clinics.
(HH) Suburban was acquired by HealthFirst on February 1, 1996 in a purchase
transaction. Accordingly, Suburban's operating results subsequent to the
purchase date are included with HealthFirst. Suburban's revenues and
expenses prior to that date are shown in the Suburban column.
A reconciliation between the pro forma statements of operations and pro
forma results disclosed in Note 12 to the HealthFirst financial statements
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Net revenues less provider compensation and benefits--
Per pro forma statement of operations:
HealthFirst............................................. $ 28,122 $ 16,281
Suburban................................................ 11,502 859
------- -------------
Per Note 12............................................... $ 39,624 $ 17,140
------- -------------
------- -------------
</TABLE>
(II) Neither enhanced revenues and cost reductions anticipated nor future
corporate costs of PPI have been included as pro forma adjustments.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
HealthFirst Medical Group, P.C.:
We have audited the accompanying balance sheets of HealthFirst Medical
Group, P.C. (an Oregon professional corporation) as of December 31, 1994 and
1995, and the related statements of operations, stockholders equity and cash
flows for each of the years in the three year period ended December 31, 1995.
These financial statements are the responsibility of HealthFirst's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HealthFirst Medical Group,
P.C. as of December 31, 1994 and 1995, and the results of its operations and its
cash flows for each of the years in the three year period ended December 31,
1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
September 6, 1996
F-17
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- JUNE 30,
1994 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,975 $ 124,916 $ 3,560,432
Short-term investments.................................... 2,616,566 -- --
Patient accounts receivable, net of allowances for
contractual discounts and uncollectible accounts of
$1,110,193, $1,561,609 and $2,035,855 at December 31,
1994 and 1995 and June 30, 1996, respectively........... 3,342,827 4,363,353 5,924,373
Healthcare and other receivables.......................... 2,964,415 2,396,299 2,361,409
Related party receivable.................................. -- -- 22,925
Income taxes receivable................................... -- 167,988 137,081
Inventories of drugs and supplies......................... 179,059 195,395 --
Prepaid expenses and deposits............................. 202,576 281,378 366,807
-------------- -------------- --------------
Total current assets.................................. 9,307,418 7,529,329 12,373,027
-------------- -------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $2,802,561, $3,534,908 and $4,976,711 at
December 31, 1994 and 1995 and June 30, 1996,
respectively.............................................. 7,468,108 13,422,672 19,718,898
-------------- -------------- --------------
OTHER ASSETS................................................ 72,102 122,548 367,258
-------------- -------------- --------------
Total assets.......................................... $ 16,847,628 $ 21,074,549 $ 32,459,183
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-18
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- JUNE 30,
1994 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt and capital and direct
financing lease obligations............................. $ 15,727 $ 2,958,506 $ 4,276,115
Drafts payable............................................ 1,743,989 164,792 --
Accounts payable.......................................... 912,492 1,373,803 1,721,772
Income taxes payable...................................... 358,992 -- --
Accrued expenses.......................................... 280,282 241,743 1,303,961
Accrued healthcare costs.................................. 518,438 610,190 1,668,112
Accrued compensation...................................... 1,717,640 1,825,822 4,733,159
Deferred revenue.......................................... 15,000 17,686 318,773
Deferred income tax liability............................. 1,784,151 1,844,262 893,307
-------------- -------------- --------------
Total current liabilities............................. 7,346,711 9,036,804 14,915,199
-------------- -------------- --------------
LONG-TERM DEBT, net of current portion...................... 1,731,359 3,711,488 4,159,849
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of
current portion........................................... -- -- 4,470,586
DEFERRED COMPENSATION AND OTHER LONG-TERM LIABILITIES....... 425,464 627,000 3,807,021
LONG-TERM DEFERRED TAX LIABILITY............................ 91,081 102,522 60,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock--
Series 1 Class A--Voting; no par value; 800,000 shares
authorized; 4,950, 5,650 and 5,800 shares issued and
outstanding at December 31, 1994 and 1995 and June 30,
1996, respectively.................................... 495,000 565,000 576,000
Series 2 Class A--Voting; no par value; 200,000 shares
authorized; 0, 0 and 2,200 shares issued and
outstanding at December 31, 1994 and 1995 and June 30,
1996, respectively.................................... -- -- 330,000
Series 3, 4 and 5 Class A--Voting; no par value;
200,000, 100,000 and 100,000 shares authorized,
respectively, none issued or outstanding at December
31, 1994 and 1995 and June 30, 1996................... -- -- --
Class B--Nonvoting; no par value; 300,000 shares
authorized; all shares repurchased in 1994............ -- -- --
Additional paid-in capital................................ -- -- 122,180
Retained earnings......................................... 6,909,269 7,201,035 4,371,161
Notes receivable from stockholders for purchase of
stock................................................... (151,256) (169,300) (352,813)
-------------- -------------- --------------
Total stockholders' equity............................ 7,253,013 7,596,735 5,046,528
-------------- -------------- --------------
Total liabilities and stockholders' equity............ $ 16,847,628 $ 21,074,549 $ 32,459,183
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-19
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Fee-for-service, net............ $ 13,504,882 $ 18,813,260 $ 22,834,493 $ 10,748,962 $ 15,195,289
Prepaid healthcare.............. 10,893,470 13,463,161 14,817,480 7,249,960 13,511,237
------------- ------------- ------------- ------------- -------------
Net revenues.................. 24,398,352 32,276,421 37,651,973 17,998,922 28,706,526
Less--Provider compensation and
benefits...................... 6,278,413 8,375,513 9,529,634 4,681,719 12,426,409
------------- ------------- ------------- ------------- -------------
Net revenue less provider
compensation and benefits... 18,119,939 23,900,908 28,122,339 13,317,203 16,280,117
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES:
Clinic salaries, wages and
benefits...................... 6,276,081 8,613,746 11,736,735 5,060,228 7,747,075
Purchased medical services...... 3,157,020 3,529,743 4,253,473 1,902,884 4,130,643
Medical and office supplies..... 2,245,295 3,076,359 4,376,539 1,811,504 2,671,054
General and administrative
expenses...................... 2,470,559 3,199,543 4,490,872 2,013,690 3,368,224
Lease and rent expense.......... 607,619 655,205 853,232 430,548 830,854
Provision for uncollectible
accounts...................... 696,364 935,650 1,146,381 616,796 731,547
Depreciation and
amortization.................. 509,925 637,782 736,097 366,173 768,334
------------- ------------- ------------- ------------- -------------
Total operating expenses...... 15,962,863 20,648,028 27,593,329 12,201,823 20,247,731
------------- ------------- ------------- ------------- -------------
Operating profit (loss)....... 2,157,076 3,252,880 529,010 1,115,380 (3,967,614)
OTHER INCOME (EXPENSES):
Interest income................. 115,201 97,767 38,820 21,121 49,090
Interest expense................ (182,738) (185,921) (188,650) (121,194) (428,780)
Other........................... 113,331 189,064 120,538 55,238 453,715
------------- ------------- ------------- ------------- -------------
Net income (loss) before
income taxes................ 2,202,870 3,353,790 499,718 1,070,545 (3,893,589)
------------- ------------- ------------- ------------- -------------
INCOME TAX (BENEFIT) EXPENSE...... 888,547 1,416,323 207,952 428,218 (1,348,242)
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS)................. $ 1,314,323 $ 1,937,467 $ 291,766 $ 642,327 $ (2,545,347)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------------------------------------------------
SERIES 1 SERIES 2
CLASS A CLASS A CLASS B
--------------------------- --------------------------- ---------------------------
NUMBER NUMBER NUMBER
OF OF OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992......... 3,450 $ 345,000 -- $ -- 1,065 $ 106,508
Issuance of common stock......... 600 60,000 -- -- -- --
Repayment of notes receivable
from stockholders.............. -- -- -- -- -- --
Net income....................... -- -- -- -- -- --
----- ------------ ----- ------------ ------ ------------
BALANCE, December 31, 1993......... 4,050 405,000 -- -- 1,065 106,508
Issuance of common stock......... 1,000 100,000 -- -- -- --
Redemption of common stock....... (100) (10,000) -- -- (1,065) (106,508)
Repayment of notes receivable
from stockholders.............. -- -- -- -- -- --
Net income....................... -- -- -- -- -- --
----- ------------ ----- ------------ ------ ------------
BALANCE, December 31, 1994......... 4,950 495,000 -- -- -- --
Issuance of common stock......... 800 80,000 -- -- -- --
Redemption of common stock....... (100) (10,000) -- -- -- --
Repayment of notes receivable
from stockholders.............. -- -- -- -- -- --
Net income....................... -- -- -- -- -- --
----- ------------ ----- ------------ ------ ------------
BALANCE, December 31, 1995......... 5,650 565,000 -- -- -- --
Notes receivable from
stockholders acquired from
Suburban (unaudited)........... -- -- -- -- -- --
Common stock issued to acquire
Suburban (unaudited)........... -- -- 2,200 330,000 -- --
Issuance of common stock
(unaudited).................... 200 20,000 -- -- -- --
Redemption of common stock
(unaudited).................... (50) (9,000) -- -- -- --
Repayment of notes receivable
from shareholders
(unaudited).................... -- -- -- -- -- --
Costs incurred related to
Physician Partners, Inc.
transaction (unaudited)........ -- -- -- -- -- --
Net loss (unaudited)............. -- -- -- -- -- --
----- ------------ ----- ------------ ------ ------------
BALANCE, June 30, 1996
(unaudited)...................... 5,800 $ 576,000 2,200 $ 330,000 -- $ --
----- ------------ ----- ------------ ------ ------------
----- ------------ ----- ------------ ------ ------------
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE
PAID-IN RETAINED FROM
CAPITAL EARNINGS STOCKHOLDERS TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992......... $ -- $ 3,657,479 $ (124,834) $ 3,984,153
Issuance of common stock......... -- -- (60,000) --
Repayment of notes receivable
from stockholders.............. -- -- 45,389 45,389
Net income....................... -- 1,314,323 -- 1,314,323
------------ ------------ ------------ ------------
BALANCE, December 31, 1993......... -- 4,971,802 (139,445) 5,343,865
Issuance of common stock......... -- -- (100,000) --
Redemption of common stock....... -- -- -- (116,508)
Repayment of notes receivable
from stockholders.............. -- -- 88,189 88,189
Net income....................... -- 1,937,467 -- 1,937,467
------------ ------------ ------------ ------------
BALANCE, December 31, 1994......... -- 6,909,269 (151,256) 7,253,013
Issuance of common stock......... -- -- (80,000) --
Redemption of common stock....... -- -- -- (10,000)
Repayment of notes receivable
from stockholders.............. -- -- 61,956 61,956
Net income....................... -- 291,766 -- 291,766
------------ ------------ ------------ ------------
BALANCE, December 31, 1995......... -- 7,201,035 (169,300) 7,596,735
Notes receivable from
stockholders acquired from
Suburban (unaudited)........... -- -- (194,597) (194,597)
Common stock issued to acquire
Suburban (unaudited)........... 122,180 -- -- 452,180
Issuance of common stock
(unaudited).................... -- -- (20,000) --
Redemption of common stock
(unaudited).................... -- -- -- (9,000)
Repayment of notes receivable
from shareholders
(unaudited).................... -- -- 31,084 31,084
Costs incurred related to
Physician Partners, Inc.
transaction (unaudited)........ -- (284,527) -- (284,527)
Net loss (unaudited)............. -- (2,545,347) -- (2,545,347)
------------ ------------ ------------ ------------
BALANCE, June 30, 1996
(unaudited)...................... $ 122,180 $ 4,371,161 $ (352,813) $ 5,046,528
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ 1,314,323 $ 1,937,467 $ 291,766 $ 642,327 $ (2,545,347)
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating
activities--
Depreciation and amortization.................. 509,925 637,782 736,097 366,173 768,334
Gain on sale of property, plant and
equipment.................................... -- (32,334) -- -- --
Deferred taxes................................. 591,817 330,383 71,551 652,369 (982,477)
Changes in operating assets and liabilities:
Patient accounts receivable, net............. (522,101) (813,916) (1,020,526) (201,149) (808,020)
Healthcare and other receivables............. (802,077) (682,512) 568,116 1,683,765 791,890
Related party receivable..................... -- -- -- -- 305,075
Income taxes receivable...................... -- -- (167,988) -- 67,907
Inventories of drugs and supplies............ (83,301) 33,174 (16,336) 38,003 251,395
Prepaid expenses and deposits................ (82,457) (10,330) (78,802) 58,708 26,571
Other assets................................. 48,577 (31,240) (50,446) (48,377) (146,127)
Drafts payable............................... -- 1,743,989 (1,579,197) (1,743,989) (164,792)
Accounts payable............................. (713,735) 670,417 461,312 295,439 29,969
Income taxes payable......................... 62,061 233,334 (358,992) (547,632) --
Accrued expenses............................. 185,821 94,461 (38,539) (159,410) 1,031,218
Accrued healthcare costs..................... (30,646) 109,643 91,752 3,573 (284,078)
Accrued compensation......................... (177,477) 94,003 108,182 52,910 2,089,337
Deferred revenue............................. 8,300 6,700 2,686 (6,157) 301,087
Deferred compensation and other long-term
liabilities................................ 61,581 (11,197) 201,536 100,768 2,798,021
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities............................... 370,611 4,309,824 (777,828) 1,187,321 3,529,963
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..... (1,346,473) (2,469,749) (6,690,661) (2,566,199) (1,740,560)
Proceeds from sale of property, plant and
equipment.................................... -- 40,261 -- -- --
Purchases of investments....................... (149,977) (2,465,167) -- -- --
Cash proceeds received from short-term
investments.................................. 1,719,508 -- 2,616,566 2,616,566 --
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) investing
activities............................... 223,058 (4,894,655) (4,074,095) 50,367 (1,740,560)
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt....... -- -- 4,939,909 -- 1,157,340
Principal payments on long-term debt........... (12,823) (14,362) (17,001) (7,733) (479,784)
Proceeds from repayments of notes receivable
from stockholders............................ 35,389 38,188 33,046 15,756 31,084
Payments for redemption of common stock........ -- (116,508) (10,000) (10,000) (9,000)
Proceeds from issuance of common stock......... 10,000 50,000 28,910 --
Cash received in acquisition of Suburban....... -- -- -- -- 231,000
Cash received from direct financing lease
obligation................................... -- -- -- -- 1,000,000
Costs incurred related to Physician Partners,
Inc. transaction............................. -- -- -- -- (284,527)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) financing
activities............................... 32,566 (42,682) 4,974,864 (1,977) 1,646,113
------------- ------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH.................... 626,235 (627,513) 122,941 1,235,711 3,435,516
CASH AND CASH EQUIVALENTS, beginning of period..... 3,253 629,488 1,975 1,975 124,916
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period........... $ 629,488 $ 1,975 $ 124,916 $ 1,237,686 $ 3,560,432
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-22
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................... $ 176,203 $ 178,928 $ 186,330 $ 121,194 $ 267,880
Cash paid for income taxes....................... 322,997 1,012,033 445,724 -- 42,220
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations with related parties
assumed in the acquisition of Suburban......... $ -- $ -- $ -- $ -- $3,575,000
Notes receivable issued in exchange for common
stock.......................................... 60,000 100,000 80,000 -- 20,000
HealthFirst acquired all of the outstanding stock
of Suburban in exchange for 2,200 shares of
HealthFirst Series 2 Class A stock. The
acquisition was recorded under the purchase
method of accounting. The fair values of
Suburban's assets and liabilities at the date
of acquisition are presented below:
</TABLE>
<TABLE>
<S> <C>
Current assets................................................ $ 2,284,000
Property, plant and equipment................................. 5,325,000
Other long-term assets........................................ 99,000
Current liabilities........................................... (2,833,000)
Long-term liabilities......................................... (4,617,000)
--------------
Net equity acquired........................................... $ 258,000
--------------
--------------
Reconciliation to equity accounts:
Common stock................................................ $ 330,000
Additional paid-in capital.................................. 122,000
Notes receivable from stockholders.......................... (194,000)
--------------
$ 258,000
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. DESCRIPTION OF BUSINESS:
HealthFirst Medical Group, P.C. (HealthFirst), an Oregon professional
corporation, is a multi-specialty medical clinic founded in 1909. In February
1996, The Metropolitan Clinic, P.C. (Metropolitan) merged with The Suburban
Medical Clinic, P.C. (Suburban). Effective February 1996, Metropolitan changed
its name to HealthFirst and Suburban changed its name to HealthFirst Medical
Services Organization and became a 100 percent owned subsidiary of HealthFirst.
The merger has been accounted for as a purchase of Suburban by Metropolitan in
the accompanying financial statements for the six months ended June 30, 1996.
The unaudited June 30, 1996 results include Suburban's operating results from
the date of acquisition.
As of June 30, 1996, HealthFirst consisted of approximately 629 employees
and 136 providers who offer a wide range of primary and specialty care services
including allergy, dermatology, gastroenterology, hematology/oncology,
infectious disease, pediatrics, geriatrics, obstetrics/gynecology, podiatry,
rheumatology and surgery.
HealthFirst operates clinics in eleven locations in and around Portland,
Oregon including: Tualatin, Tigard, Westside, Lake Oswego, Broadway, Northwest
Portland, Wilshire, Gateway, Gresham, Hollywood and Powell Valley, four of these
clinics were acquired as a part of the purchase of Suburban. A significant
change in the demographics of this area may have an adverse impact on the
business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with
original maturities of three months or less.
CONCENTRATION OF CREDIT RISK
HealthFirst extends credit to patients covered by insurance programs such as
governmental programs (Medicare and Medicaid) and private programs. HealthFirst
manages credit risk with the various public and private insurance providers, as
deemed appropriate by management. Allowances for doubtful accounts have been
made for potential losses, where appropriate.
INVENTORIES OF DRUGS AND SUPPLIES
Inventories are stated at the lower of cost or market, determined by the
first-in, first-out (FIFO) method. In 1996, HealthFirst began using a
just-in-time method with its major supply vendors.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Maintenance, repairs and
minor replacements are expensed as incurred. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts and any gain or loss on disposition is recorded as
other income or expense.
F-24
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Equipment under capital lease is
amortized using straight-line methods over the shorter of the period of the
lease term or the estimated useful life of the equipment. Estimated lives are as
follows:
<TABLE>
<S> <C>
Buildings and leasehold improvements.............. 7-45 years
Furniture and equipment........................... 3-15 years
</TABLE>
PROVIDER COMPENSATION AND BENEFITS
Provider compensation and benefits consists of the direct costs of patient
care providers such as physicians and other allied health professionals. A
substantial portion of these costs are paid to providers who are stockholders.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments,
patient receivables, accounts payable and accrued liabilities are a reasonable
estimate of their fair value based on the short maturities of these instruments.
Interest rates that are currently available to HealthFirst for issuance of
debt with similar terms and remaining maturities were used to estimate fair
value for debt issues. The current carrying value of debt approximates fair
value.
HealthFirst does not hold or issue financial instruments or derivative
financial instruments for trading purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard Number 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
establishes accounting standards for impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used, as well as for long-lived assets and certain identifiable intangibles to
be disposed of. HealthFirst adopted the new standard in 1996. The effect of the
adoption was not material to HealthFirst's financial position or results of
operations.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the interim periods ended June 30, 1995 and
1996 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the
F-25
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the unaudited interim financial
information. In the opinion of HealthFirst's management, the unaudited interim
financial information includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. Results of operations
for the interim periods are not necessarily indicative of the results of
operations for the respective full years.
3. REVENUES:
HealthFirst reports its revenues in accordance with the methodologies
discussed below:
PREPAID HEALTHCARE
HealthFirst contracts with various Health Maintenance Organizations (HMOs)
to provide care to plan enrollees. These programs provide for a prepaid monthly
fixed capitation payment on a per member basis to HealthFirst by the HMO for
plan enrollees.
The majority of the HMO contracts are full-risk or modified full-risk
contracts. Under a full-risk contract, HealthFirst assumes the obligation of
providing all healthcare services to enrollees and is obligated to reimburse
outside providers for services rendered to enrollees. Generally, such payments
to outside providers are limited to out-of-area services, emergency services and
services not currently offered by HealthFirst. Modified full-risk contracts are
similar to full-risk contracts except that the HMO is obligated to pay for
out-of-area services.
HealthFirst has entered into subcapitation agreements with certain of these
outside providers. Under these agreements, HealthFirst prepays the outside
provider based upon enrollee/participant formulas in which the subprovider
assumes the risk of providing patient care. Additional limitations on losses are
provided by the payment of stop loss reinsurance premiums and through a
percentage limitation on overall savings or losses of the programs.
HealthFirst has accrued the claims associated with services provided by
outside providers for which HealthFirst is responsible, and an estimate of
incurred but not reported claims is included in accrued healthcare cost in the
accompanying financial statements.
FEE-FOR-SERVICE
Patient service revenues are recorded in the period in which services are
provided at established rates. HealthFirst has agreements with third-party
payors that provide payments to HealthFirst at amounts different from its
established rates. The difference between the established rates and the related
payment amounts are reflected as contractual discounts, as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fee-for-service, gross............... $ 16,832,271 $ 24,173,543 $ 29,384,296 $ 13,908,449 $ 19,617,825
Contractual discounts................ 3,327,389 5,360,283 6,549,803 3,159,487 4,422,536
------------- ------------- ------------- ------------- -------------
Fee-for-service, net............... $ 13,504,882 $ 18,813,260 $ 22,834,493 $ 10,748,962 $ 15,195,289
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-26
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
3. REVENUES: (CONTINUED)
A summary of the most significant fee-for-service arrangements is as
follows:
MEDICARE
A significant portion of HealthFirst's services are provided to Medicare
patients. Payments for Medicare outpatient services which are not covered
under capitated contracts are based on a prevailing fee schedule.
Approximately 9, 9, 8 and 7 (unaudited) percent of net patient service
revenues were derived from services provided to fee-for-service Medicare
patients in 1993, 1994 and 1995, and the six months ended June 30, 1996,
respectively.
MEDICAID
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule. Approximately 2
percent of net patient service revenues were derived from services provided
to fee-for-service Medicaid patients in 1993, 1994 and 1995, and the six
months ended June 30, 1996.
OTHER PAYORS
HealthFirst has also entered into payment agreements with certain
commercial insurance carriers and preferred provider organizations. The
basis for payment under these agreements includes discounts from established
charges.
MAJOR CUSTOMERS
Four customers individually represented more than 10 percent of
HealthFirst's total net revenue as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
------------------------------- ENDED
1993 1994 1995 JUNE 30,
--------- --------- --------- 1996
----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Pacificare--Secure Horizons.............................. 14% 11% 10% 12%
Pacificare--Commercial................................... 11 11 11 11
Blue Cross--HMO Oregon................................... 10 13 16 13
Blue Cross--Commercial................................... 9 10 10 6
</TABLE>
F-27
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment includes the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land and land improvements...................... $ 1,898,512 $ 1,988,712 $ 2,001,164
Buildings and leasehold improvements............ 4,397,615 9,796,611 11,285,990
Furniture and equipment......................... 3,777,567 5,172,257 7,569,971
Construction in progress........................ 196,975 -- --
Building and equipment under capital lease...... -- -- 3,838,484
------------- ------------- -------------
10,270,669 16,957,580 24,695,609
Less--Accumulated depreciation.................. (2,802,561) (3,534,908) (4,976,711)
------------- ------------- -------------
$ 7,468,108 $ 13,422,672 $ 19,718,898
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
5. INCOME TAX EXPENSE:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109). SFAS 109 requires that HealthFirst
follow the liability method of accounting for deferred income taxes. Differences
between financial reporting and tax basis results are due primarily to the use
of the cash method of accounting for income tax purposes.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
HealthFirst's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Cash to accrual adjustments.................... $ 1,081,021 $ 1,516,422 $ 3,617,477
------------- ------------- -------------
Gross deferred tax assets.................... 1,081,021 1,516,422 3,617,477
Deferred tax liabilities:
Cash to accrual adjustments.................... (2,744,181) (3,181,474) (4,254,222)
Excess tax depreciation........................ (212,073) (281,732) (316,562)
------------- ------------- -------------
Gross deferred tax liabilities............... (2,956,254) (3,463,206) (4,570,784)
------------- ------------- -------------
Net deferred tax liability....................... $ (1,875,233) $ (1,946,784) $ (953,307)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-28
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
5. INCOME TAX EXPENSE: (CONTINUED)
The net deferred tax liability is reflected in the accompanying balance
sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred tax liability.................... $ (1,784,151) $ (1,844,262) $(893,307)
Long term deferred tax liability.................. (91,082) (102,522) (60,000)
------------- ------------- -----------
$ (1,875,233) $ (1,946,784) $(953,307)
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------ JUNE 30,
1993 1994 1995 1996
---------- ------------ ---------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal........................... $ 329,700 $ 1,003,419 $ 119,351 $ (310,419)
State............................. 47,100 143,346 17,050 (44,346)
Deferred:
Federal........................... 447,779 235,864 62,607 (869,292)
State............................. 63,968 33,694 8,944 (124,185)
---------- ------------ ---------- -----------------
$ 888,547 $ 1,416,323 $ 207,952 $ (1,348,242)
---------- ------------ ---------- -----------------
---------- ------------ ---------- -----------------
</TABLE>
The differences between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------ JUNE 30,
1993 1994 1995 1996
---------- ------------ ---------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal tax at statutory rate....... $ 771,005 $ 1,173,826 $ 174,902 $ (1,181,390)
Add (deduct):
State income tax, net of federal
benefit......................... 72,194 115,077 16,896 (109,545)
Other............................. 45,348 127,420 16,154 (57,307)
---------- ------------ ---------- -----------------
$ 888,547 $ 1,416,323 $ 207,952 $ (1,348,242)
---------- ------------ ---------- -----------------
---------- ------------ ---------- -----------------
</TABLE>
F-29
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
UNRELATED
Note payable, due in monthly installments of principal and interest of
$15,630 through July 2000, with a final payment of $1,635,845, bearing
interest at 9.875%.The note is secured by a first mortgage on land,
buildings, and improvements........................................... $ 1,747,086 $ 1,731,467 $ 1,722,697
Note payable, due in monthly installments of principal and interest of
$15,827 through December 1998, bearing interest at 8.4%. The note is
secured by inventory, furniture, and equipment........................ -- 500,000 426,335
Construction loan payable, due in monthly installments of interest only
through January 1997 with a final payment of all outstanding principal
and accrued unpaid interest on January 1997, bearing interest at prime
plus 1% (7.75% at December 31, 1995). The note is secured by building
and land.............................................................. -- 2,538,527 3,687,813
Note payable, due in monthly installments of interest only beginning
January 31, 1996 with a principal payment of $250,000 on August 31,
1996 and annual principal installments of $115,000 through August
2011, bearing interest at 7.9%........................................ -- 1,900,000 1,900,000
Note payable, due in monthly installments of $7,066 plus interest
through January 1999, bearing interest at 9.875%...................... -- -- 219,040
Note payable, due in monthly installments of $8,060 including interest
through October 2000, bearing interest at 8.75%....................... -- -- 347,772
Note payable, related party, due in monthly installments of $428
including interest through August 1998, bearing interest at 6%........ -- -- 10,358
------------ ------------ ------------
Total long-term debt.................................................. 1,747,086 6,669,994 8,314,015
Less--Current portion................................................... 15,727 2,958,506 4,154,166
------------ ------------ ------------
Long-term debt, net of current portion................................ $ 1,731,359 $ 3,711,488 $ 4,159,849
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-30
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
6. LONG-TERM DEBT: (CONTINUED)
Maturities of long-term debt for the next five years are as follows:
<TABLE>
<S> <C>
1996.......................... $ 2,958,506
1997.......................... 301,369
1998.......................... 316,748
1999.......................... 138,499
2000.......................... 1,764,872
Thereafter.................... 1,190,000
-------------
Total....................... $ 6,669,994
-------------
-------------
</TABLE>
Management intends to convert the construction loan to a mortgage loan in
1997, which would extend the maturity of the loan.
In June 1996, HealthFirst increased an existing credit agreement with a bank
to $2,500,000. The line of credit is secured by inventory, receivables and
equipment of HealthFirst which matures April 30, 1997. The agreement includes
interest at the U.S. National Bank prime rate plus .5 percent. HealthFirst did
not have any amounts outstanding under the line of credit at December 31, 1994,
1995 or June 30, 1996.
7. LEASE COMMITMENTS:
CAPITAL LEASES
HealthFirst leases certain medical equipment and facilities under agreements
which are classified as capital leases. The equipment leases have original terms
of five years and have either a bargain purchase option or a transfer of title
at the end of the lease. The building lease is with Gateway Properties LLC (see
Note 11) for a term of 21 years. Leased capital assets included in property,
plant and equipment at December 31, 1994 and 1995, and June 30, 1996 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Buildings and leasehold improvements................... $ -- $ -- $ 3,574,605
Furniture and equipment................................ -- -- 263,879
---------- ---------- ------------
-- -- 3,838,484
Less--Accumulated amortization....................... -- -- 283,767
---------- ---------- ------------
$ -- $ -- $ 3,554,717
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
OPERATING LEASES
Such lease commitments are primarily for facilities and equipment. Certain
facility leases provide for adjustments relating to the consumer price index and
operating expenses.
F-31
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
7. LEASE COMMITMENTS: (CONTINUED)
MINIMUM LEASE PAYMENTS
Future minimum lease payments, by year and in the aggregate, under
noncancellable operating leases with initial or remaining terms of one year or
more consist of the following at December 31, 1995.
<TABLE>
<S> <C>
1996.......................... $ 697,291
1997.......................... 544,105
1998.......................... 530,467
1999.......................... 446,100
2000.......................... 466,440
Thereafter.................... 2,378,310
-------------
$ 5,062,713
-------------
-------------
</TABLE>
Due to the acquisition of Suburban in February 1996, HealthFirst assumed
operating leases with estimated future minimum lease payments of $324,715,
$324,715, $333,195, $333,965, $228,570 and $604,333 for the years ending
December 31, 1996, 1997, 1998, 1999, 2000 and thereafter, respectively.
HealthFirst also assumed capital lease obligations in the aggregate amount of
$3,648,220 with estimated future minimum lease payments, including interest of
$4,457,408, are $463,771, $463,770, $457,582, $426,635, $416,787 and $5,877,083
for the years ending December 31, 1996, 1997, 1998, 1999, 2000 and thereafter,
respectively.
DIRECT FINANCING LEASE OBLIGATION
In May 1996, HealthFirst sold three facilities to HealthFirst Properties LLC
(see Note 11) under a sale/leaseback arrangement. The facilities were sold for
$12,550,000, $11,550,000 of which is due in the form of an 8 percent
interest-bearing note receivable due in monthly installments through April 2016.
The remainder was received in cash. The transaction has been accounted for as a
financing, wherein the property and related debt remains on the books and will
continue to be depreciated. A financing obligation representing the proceeds of
$1 million has been recorded and will be reduced based on payments under the
lease. As sales proceeds are received from the LLC, they will be credited to a
financing obligation, and amortized as a reduction of operating expenses over
the remaining life of the lease. The lease has a term of 20 years and requires
minimum annual rental payments of $878,504 in 1996, $1,317,756 in 1997, 1998,
1999 and 2000, and $20,205,592 thereafter.
8. EMPLOYEE BENEFIT PLANS:
RETIREMENT PLAN
HealthFirst has a noncontributory profit sharing plan covering all employees
who are eligible subject to certain requirements. HealthFirst, at the discretion
of the Board of Directors, contributes an annual amount not to exceed the
maximum allowed under the Internal Revenue Code. In the year ended December 31,
1993, HealthFirst contributed $440,044 to the Plan. Subsequent to 1993, no
contributions to the Plan have been made. HealthFirst does not foresee making
contributions to the profit sharing plan in the future.
F-32
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
8. EMPLOYEE BENEFIT PLANS: (CONTINUED)
In 1994, HealthFirst added a 401(k) plan covering employees who are eligible
subject to certain requirements. Employees contribute between 2 to 10 percent of
their annual compensation. HealthFirst matches employee contributions at a rate
of 10 percent plus a discretionary percentage determined by the Board of
Directors. The contributions to the Plan were $0, $215,190, $68,823, $34,412
(unaudited) and $55,439 (unaudited) in the years ended December 31, 1993, 1994,
and 1995, and in the six months ended June 30, 1995 and 1996, respectively.
HealthFirst also has a defined contribution money purchase pension plan
which is a plan in which all employees are eligible to participate subject to
certain requirements. HealthFirst contributes 8 percent of employees'
compensation which does not exceed the Social Security integration level, plus a
higher percentage of the amount in excess of the integration level for the Plan
year. The contributions in the years ended December 31, 1993, 1994, and 1995 and
the six months ended June 30, 1995 and 1996 were $743,487, $942,286, $1,132,887,
$566,444 (unaudited) and $709,347 (unaudited), respectively.
SUPPLEMENTAL PENSION PLAN
In 1987, HealthFirst entered into a supplemental pension plan with eight of
its physicians providing for fixed monthly payments over five years commencing
with the physicians' retirements or terminations. The physicians receive
payments upon retirement or termination if certain vesting requirements have
been met. The liability under this agreement is being accrued over the
physicians' estimated remaining service periods before becoming fully vested. On
the vesting date, the present value of the future benefit payments will have
been accrued. HealthFirst has accrued $163,509, $169,606 and $172,766 for the
plan at December 31, 1994 and 1995 and June 30, 1996, respectively.
SUBURBAN PROFIT-SHARING PLAN
As part of the 1996 acquisition of Suburban, HealthFirst assumed a
profit-sharing plan in which all former employees of Suburban are eligible to
participate subject to certain eligibility criteria. The plan is funded by
discretionary employer contributions as determined by the Board of Directors on
an annual basis. The amount of employer contributions, if any, is allocated to
eligible employees based on employee compensation. HealthFirst's contributions
for the first six months of 1996 was $47,250.
HEALTHFIRST BONUS COMPENSATION PLAN
In February 1996, HealthFirst established a bonus compensation plan for
eligible employees. Employees are vested after five years of employment with
credit for prior service. A substantial portion of the participants were fully
vested as of June 30, 1996. The total payout of approximately $5.25 million will
be over a period of eight years. HealthFirst is accruing for the estimated
present value of the bonus compensation over the estimated period of the
employees' active employment from the date the contract was signed until the
date they are fully vested. Compensation expense recognized during the six
months ended June 30, 1996 was approximately $3.9 million, a portion of which
has been paid. The expense was recorded to provider compensation and benefits.
The amount accrued at June 30, 1996 is $3,299,674, of which $501,653 is included
in current liabilities and the remainder is included in deferred compensation.
F-33
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
9. PROFESSIONAL LIABILITY:
HealthFirst maintains a claims-made professional liability insurance policy.
The policy coverage for the healthcare providers formerly employed by
Metropolitan is $5,000,000 per claim, with no aggregate maximum limit, for
claims made against HealthFirst and its employees. The policy coverage for the
healthcare providers formerly employed by Suburban is $2,000,000 per claim,
$4,000,000 aggregate maximum benefit, for claims made against HealthFirst and
its employees. Accruals for outstanding claims and the associated deductibles
are made in the period in which the event becomes known. HealthFirst also
accrues an actuarial estimate of the future liability for claims incurred but
not reported prior to the end of the accounting period.
10. LEGAL PROCEEDINGS:
HealthFirst is subject to various legal proceedings and claims which arise
in the ordinary course of business. In the opinion of management, although the
ultimate dispositions of these proceedings are not determinable, adverse
determinations in any or all of such proceedings would not have a material
adverse effect upon the financial position or results of operations of
HealthFirst.
11. RELATED PARTY TRANSACTIONS:
COORDINATED HEALTH NETWORK, INC.
In December 1993, HealthFirst became a one-third shareholder in Coordinated
Health Network, Inc. (CHN). CHN was formed to obtain patient contracts under the
Oregon Health Plan and generate purchasing discounts. The investment in CHN has
been accounted for under the equity method. In 1993, 1994 and 1995, HealthFirst
paid premiums to CHN of $0, $57,167 and $106,204, respectively, and CHN paid
HealthFirst $0, $154,711 and $621,654 in 1993, 1994 and 1995, respectively, for
claims. CHN legally dissolved in 1996.
NORTHWEST PHYSICIANS ALLIANCE
In 1995, HealthFirst invested $52,000 for a one-third share in Northwest
Physicians Alliance (the Alliance), which was formed with Blue Cross/Blue Shield
of Oregon, two local hospital systems and several physician groups. The Alliance
has been accounted for under the equity method. The Alliance is intended to be
the primary delivery network for Blue Cross/Blue Shield's HMO Oregon product in
the Portland area.
HEALTHFIRST PROPERTIES, LLC
HealthFirst Properties, LLC (HPLLC) was formed by certain shareholders of
HealthFirst in 1996 to acquire three clinic buildings from HealthFirst. HPLLC
purchased these properties from HealthFirst for an aggregate purchase price of
$12,550,000, to be paid under an installment sale contract with a 20-year term.
In addition, HPLLC made a $1 million down payment to HealthFirst. Simultaneous
with the execution of the installment sale contract, HealthFirst agreed to lease
back the three buildings from HPLLC under a 20-year lease agreement. This
transaction has been recorded as a direct financing lease. Accordingly, the
monies received from HPLLC have been recorded as a direct financing lease
obligation and the related property is included in property, plant and equipment
in the accompanying financial statements.
F-34
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
11. RELATED PARTY TRANSACTIONS: (CONTINUED)
GATEWAY PROPERTIES LLC
Gateway Properties LLC (Gateway) is owned by several former shareholders of
Suburban. Throughout 1995, Suburban recorded notes receivable for various
payments made on behalf of Gateway. The note receivable at June 30, 1996 was
$169,107. The terms of the note include monthly installments of principal and
interest of $4,878 through August 1999 with interest accruing at 7 percent.
HealthFirst has signed a capital lease to occupy the new clinic building for a
term expiring in August 2015.
STOCK SUBSCRIPTIONS
HealthFirst maintains various agreements with stockholders for their
purchase of common stock. The notes mature at various stages through the year
2008.
12. BUSINESS ACQUISITION:
On February 1, 1996, HealthFirst acquired all of the outstanding stock of
the Suburban Medical Clinic, Inc. in exchange for 2,200 shares of HealthFirst
Series 2 Class A stock. Following the acquisition, the name of Suburban was
changed to HealthFirst Management Services Organization, P.C. (HealthFirst
M.S.O.).
Results of operations after the acquisition date are included in the June
30, 1996 statement of income. The following pro forma information has been
prepared assuming that this acquisition had taken place at the beginning of
1995. Because fair values of purchased assets approximated their carrying
values, no material pro forma adjustment was necessary to adjust historical
depreciation and amortization.
The pro forma financial information is not necessarily indicative of the
results of operations as they would have been had the acquisition been
consummated on the assumed dates.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED ------------------------------
DECEMBER 31, 1995 JUNE 30, 1995 JUNE 30, 1996
----------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues less provider compensation
and benefits............................ $ 39,624,916 $ 18,486,636 $ 17,139,177
Operating expenses........................ (40,363,520) (18,216,467) (21,485,633)
Other income (expenses)................... (215,228) (62,693) 85,116
----------------- -------------- --------------
Income (loss) before income taxes....... (953,832) 207,476 (4,261,340)
Income tax (benefit) expense.............. (402,438) (4,873) (1,348,242)
----------------- -------------- --------------
Net income (loss)....................... $ (551,394) $ 212,349 $ (2,913,098)
----------------- -------------- --------------
----------------- -------------- --------------
</TABLE>
13. SUBSEQUENT EVENTS:
PHYSICIAN PARTNERS, INC.
The Board of Directors of HealthFirst has approved a Reorganization and
Merger Agreement (the Agreement) dated July 29, 1996 together with the Boards of
The Corvallis Clinic, P.C. and the Medford Clinic, P.C.; and Physician Partners,
Inc. (PPI), a newly formed company. This Agreement is subject to the approval of
the shareholders of the three medical groups.
F-35
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
13. SUBSEQUENT EVENTS: (CONTINUED)
This transaction would result in a separation of operations of the three
founding medical groups between medical professional services activities (i.e.,
providers and medical service staff) and the physician practice management
activities of the business. The professional services activities would be spun
off into newly formed professional corporations (New PCs). The physician
practice management business, along with substantially all of the assets and
liabilities of the three founding medical groups, i.e., accounts receivable,
property, plant, equipment, contracts, payables, accruals and debt, would be
transferred to PPI. When the transaction becomes effective, the shareholders of
the existing founding clinics will become the original shareholders of PPI.
An integral part of the reorganization is a 40-year management agreement
whereby PPI would provide physician practice management services to the New PCs.
Services to be provided would include management and administrative services,
capital resources, facilities, equipment and supplies.
As consideration, PPI would be entitled to (a) reimbursement of all
managerial costs and expenses (Manager's Expenses) incurred by PPI and (b) a
management fee equal to 16 percent of the Distributable Profit Amount (defined
as (i) gross revenues, booked on an accrual basis and subtracting contractual
discounts and bad debts, received by PPI or the New PCs relating to services
provided by the New PCs less (ii) Manager s Expense).
The New PCs would be responsible for providing medical services and the
related costs for provider compensation and benefits.
The reorganization Agreement contains a provision which would allow for any
of the three founding medical groups to make a distribution to its shareholders
if its shareholders' equity at June 30, 1996 exceeded a minimum threshold amount
as defined in the Agreement.
The parties to the reorganization transaction will receive an opinion from
tax counsel that for federal income tax purposes, it is more likely than not
that the reorganization will be a tax-free transaction. No ruling will be
requested from the Internal Revenue Service regarding the tax consequences of
the transaction. If the IRS or tax court were to determine that the transactions
were not tax free, there would be significant adverse tax consequence to the
parties to the transaction and their respective shareholders.
The reorganization Agreement contemplates that each of the three founding
medical groups will adopt a stock option plan for certain of its employees and
grant new options to purchase shares of its capital stock. Such options would
then be converted into options to purchase PPI stock.
In anticipation of the consummation of the reorganization transaction,
various individuals have entered into Employment Agreements with PPI which
provide for base compensation, incentive bonuses, stock options and awards,
termination benefits and, in certain cases, severance compensation in the event
the transaction is not consummated prior to January 31, 1997. The obligations of
PPI under certain of these agreements are guaranteed by the three founding
medical groups.
In connection with the reorganization transaction, the three founding
medical groups have entered into an Expense Sharing Agreement which establishes
the basis upon which certain costs incurred in connection with the transactions
are to be allocated between the three groups.
In accordance with the terms of the reorganization Agreement, if one of the
parties terminates the Agreement, in certain circumstances, it may be liable to
the other parties to pay all of their expenses incurred in connection with the
transaction.
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
The Suburban Medical Clinic, Inc.:
We have audited the accompanying balance sheets of The Suburban Medical
Clinic, Inc. (an Oregon professional corporation) as of December 31, 1994 and
1995, and the related statements of operations, cash flows and stockholders'
equity for each of the years in the three year period ended December 31, 1995.
These financial statements are the responsibility of Suburban's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Suburban Medical Clinic,
Inc. as of December 31, 1994 and 1995, and the results of its operations and its
cash flows for each of the years in the three year period ended December 31,
1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
September 6, 1996
F-37
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
BALANCE SHEETS--DECEMBER 31, 1994 AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 258,542 $ 394,849
Patient accounts receivable, net of allowances for contractual discounts and
uncollectible accounts of $313,719 and $307,053 in 1994 and 1995,
respectively................................................................ 922,373 752,526
Healthcare and other receivables.............................................. 1,565,792 756,784
Related party receivables..................................................... 88,631 328,060
Inventories of drugs and supplies............................................. 41,608 55,992
Prepaid expenses and deposits................................................. 143,109 112,106
Current deferred tax asset.................................................... -- 10,585
------------- -------------
Total current assets...................................................... 3,020,055 2,410,902
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $829,560 and
$648,028 for 1994 and 1995, respectively...................................... 1,017,182 5,286,997
------------- -------------
LONG-TERM DEFERRED TAX ASSET.................................................... 11,160 37,246
OTHER ASSETS, related parties................................................... 596,046 136,740
------------- -------------
Total assets.............................................................. $ 4,644,443 $ 7,871,885
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations............... $ 113,341 $ 324,096
Accounts payable.............................................................. 479,750 348,960
Accrued healthcare costs...................................................... 636,705 1,341,663
Accrued compensation.......................................................... 823,738 818,433
Deferred income tax liability................................................. 624,607 --
------------- -------------
Total current liabilities................................................. 2,678,141 2,833,152
------------- -------------
LONG-TERM DEBT, net of current portion.......................................... 281,124 697,260
------------- -------------
CAPITAL LEASE OBLIGATIONS, net of current portion............................... 90,833 3,537,350
OTHER LONG TERM LIABILITIES..................................................... 355,655 382,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock--
Class A--Voting; no par value; 2,000 shares authorized; 1,400 and 2,200
shares issued and outstanding at December 31, 1994 and 1995,
respectively.............................................................. 210,000 330,000
Retained earnings............................................................. 1,129,779 286,619
Notes receivable from stockholders for the purchase of stock.................. (101,089) (194,496)
------------- -------------
Total stockholders' equity................................................ 1,238,690 422,123
------------- -------------
Total liabilities and stockholders' equity................................ $ 4,644,443 $ 7,871,885
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-38
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
----------------------------------------------- ENDED
1993 1994 1995 JUNE 30, 1995
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Fee-for-service, net...................... $ 2,736,076 $ 3,556,688 $ 4,013,507 $ 1,099,537
Prepaid healthcare........................ 10,461,020 11,136,889 11,404,888 5,860,177
------------- ------------- ------------- -------------
Net revenues............................ 13,197,096 14,693,577 15,418,395 6,959,714
Less--Provider compensation and
benefits................................ 3,293,586 3,513,863 3,915,818 1,790,281
------------- ------------- ------------- -------------
Net revenue less compensation to
providers............................. 9,903,510 11,179,714 11,502,577 5,169,433
OPERATING EXPENSES:
Clinic salaries, wages and benefits....... 3,088,539 3,270,221 3,832,011 1,991,838
Purchased medical services................ 4,263,041 3,662,967 4,718,905 2,253,970
Medical and office supplies............... 1,052,076 937,493 1,094,804 517,529
Clinic general and administrative
expenses................................ 1,166,248 1,790,545 2,232,909 847,869
Lease and rent expense.................... 352,486 450,679 434,470 197,436
Provision for uncollectible accounts...... 124,620 309,038 182,274 91,137
Depreciation.............................. 126,315 167,819 274,818 114,865
------------- ------------- ------------- -------------
Total operating expenses................ 10,173,325 10,588,762 12,770,191 6,014,644
------------- ------------- ------------- -------------
Operating profit (loss)................. (269,815) 590,952 (1,267,614) (845,211)
OTHER INCOME (EXPENSE):
Interest income........................... 25,013 33,721 48,716 16,499
Interest expense.......................... (8,953) (19,257) (239,896) (23,024)
Equity in loss of affiliate............... (7,878) (9,324) (26,816) --
Other..................................... 14,639 49,288 32,060 (11,333)
------------- ------------- ------------- -------------
Net income (loss) before income taxes... (246,994) 645,380 (1,453,550) (863,069)
------------- ------------- ------------- -------------
INCOME TAX (BENEFIT) EXPENSE................ (98,988) 262,667 (610,390) (433,091)
------------- ------------- ------------- -------------
NET INCOME (LOSS)........................... $ (148,006) $ 382,713 $ (843,160) $ (429,978)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK NOTES
----------------------- RECEIVABLE
NUMBER OF RETAINED FROM
SHARES AMOUNT EARNINGS STOCKHOLDERS TOTAL
----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992...................... 1,400 $ 210,000 $ 895,072 $ (198,877) $ 906,195
Issuance of common stock...................... 200 30,000 -- (30,000) --
Redemption of common stock.................... (200) (30,000) -- -- (30,000)
Repayment of notes receivable from
stockholders................................ -- -- -- 24,182 24,182
Forgiveness of notes receivable from
stockholders................................ -- -- -- 59,114 59,114
Net loss...................................... -- -- (148,006) -- (148,006)
----- ---------- ------------ ------------ ------------
BALANCE, December 31, 1993...................... 1,400 210,000 747,066 (145,581) 811,485
Repayment of notes receivable from
stockholders................................ -- -- -- 44,492 44,492
Net income.................................... -- -- 382,713 -- 382,713
----- ---------- ------------ ------------ ------------
BALANCE, December 31, 1994...................... 1,400 210,000 1,129,779 (101,089) 1,238,690
Issuance of common stock...................... 800 120,000 -- (120,000) --
Repayment of notes receivable from
stockholders................................ -- -- -- 26,593 26,593
Net loss...................................... -- -- (843,160) -- (843,160)
----- ---------- ------------ ------------ ------------
BALANCE, December 31, 1995...................... 2,200 $ 330,000 $ 286,619 $ (194,496) $ 422,123
----- ---------- ------------ ------------ ------------
----- ---------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
--------------------------------------------- ENDED
1993 1994 1995 JUNE 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ (148,006) $ 382,713 $ (843,160) $ (429,978)
Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activities--
Depreciation................................................... 126,315 167,819 274,818 114,865
Equity in loss of affiliates................................... 7,878 9,324 26,816 --
Loss on sale of property, plant and equipment.................. -- -- 33,953 --
Noncash compensation for provider services..................... 59,114 -- -- --
Deferred income taxes.......................................... (76,398) 279,178 (661,278) (625,114)
Changes in operating assets and liabilities:
Patient accounts receivable, net............................. (138,596) (277,344) 169,847 340,569
Healthcare and other receivables............................. 246,024 189,075 809,008 616,075
Related party receivables.................................... -- (88,631) (239,429) (390,288)
Inventories of drugs and supplies............................ (44,346) 24,068 (14,384) 30,084
Prepaid expenses and deposits................................ (80,674) (19,272) 31,003 65,186
Other assets, related parties................................ (54,467) (468,091) 24,703 26,385
Accounts payable............................................. (161,880) 235,923 (130,790) (148,801)
Income taxes payable......................................... 1,692 (1,692) -- 107,337
Accrued healthcare costs..................................... 176,433 (586,896) 704,958 353,718
Accrued compensation......................................... 633,495 (321,060) (5,305) 123,704
Other long-term liabilities.................................. 52,235 52,688 26,345 13,173
------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities........ 598,819 (422,198) 207,105 196,915
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment....................... (203,212) (536,310) (994,102) (288,471)
Cash distributions received from liquidation of partnership
interest....................................................... -- -- 407,787 407,787
------------- ------------- ------------- -------------
Net cash used in investing activities...................... (203,212) (536,310) (586,315) 119,316
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt......................... 75,932 339,156 688,550 298,000
Principal payments on long-term debt and capital lease
obligations.................................................... (37,664) (86,126) (199,626) (68,693)
Proceeds from repayments of notes receivable from stockholders... 24,182 44,492 26,593 10,736
------------- ------------- ------------- -------------
Net cash provided by financing activities.................. 62,450 297,522 515,517 240,043
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH.................................... 458,057 (660,986) 136,307 556,274
CASH, beginning of period.......................................... 461,471 919,528 258,542 258,542
------------- ------------- ------------- -------------
CASH, end of period................................................ $ 919,528 $ 258,542 $ 394,849 $ 814,816
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................... $ 7,597 $ 11,937 $ 65,493 $ 18,519
Cash paid for income taxes....................................... -- -- 41,223 --
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations issued to a related party in exchange
for property, plant and equipment............................ 164,000 -- 3,396,735 --
Notes receivable issued in exchange for common stock........... 30,000 -- 120,000 --
Notes payable issued for redemption of common stock............ 30,000 -- -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. BUSINESS AND ORGANIZATION:
The Suburban Medical Clinic, Inc. (Suburban), an Oregon professional
corporation, is a multi-specialty medical clinic founded in 1956.
Suburban consists of approximately 200 employees and 29 physicians who offer
a wide range of primary care medical services, including internal medicine,
pediatrics, geriatrics, podiatry and dermatology.
Suburban operates clinics in four locations in and around Portland, Oregon
including: Gateway, Gresham, Hollywood and Powell Valley. A significant change
in the demographics of this area may have an adverse impact on the business.
Effective February 1, 1996, Suburban merged with HealthFirst Medical Group,
P.C. (HealthFirst) and was renamed HealthFirst Management Services Organization,
Inc. The stockholders of Suburban exchanged their stock for stock of
HealthFirst, Inc. Suburban became a wholly owned subsidiary of HealthFirst
Medical Group, P.C. and will operate as a management company providing
contracting services for prepaid medical plans.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
Cash equivalents consist of all highly liquid investments with original
maturities of three months or less.
CONCENTRATION OF CREDIT RISK
Suburban extends credit to patients covered by insurance programs such as
governmental programs (Medicare and Medicaid) and private programs. Suburban
manages credit risk with the various public and private insurance providers, as
deemed appropriate by management. Allowances for doubtful accounts have been
made for potential losses, where appropriate.
INVENTORIES OF DRUGS AND SUPPLIES
Inventories are stated at the lower of cost or market, determined by the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Maintenance, repairs and
minor replacements are expensed as incurred. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts and any resulting gain or loss is recorded as other
income or expense.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Equipment under capital lease is
amortized using straight-line methods over the shorter of the period of the
lease term or the estimated useful life of the equipment. Estimated lives are as
follows:
<TABLE>
<S> <C>
Buildings and building improvements......................... 7-40 years
Furniture and equipment..................................... 5-7 years
</TABLE>
F-42
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROVIDER COMPENSATION AND BENEFITS
Provider compensation and benefits consists of the direct costs of patient
care providers such as physicians and other allied health professionals. A
substantial portion of these costs are paid to providers who are stockholders.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, patient receivables,
amounts payable and accrued liabilities are a reasonable estimate of their fair
value based on the short maturities of these instruments.
Interest rates that are currently available to Suburban for issuance of debt
with similar terms and remaining maturities were used to estimate fair value for
debt issues. The current carrying value of debt approximates fair value.
Suburban does not hold or issue financial instruments or derivative
financial instruments for trading purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
establishes accounting standards for impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used, as well as for long-lived assets and certain identifiable intangibles to
be disposed of. Suburban adopted the new Standard in 1996 as part of
HealthFirst. The effect of the adoption was not material to Suburban's financial
position or results of operations.
3. REVENUES:
Suburban reports its revenues in accordance with the methodologies discussed
below:
PREPAID HEALTHCARE
Suburban contracts with various Health Maintenance Organizations (HMOs) to
provide care to plan enrollees. These programs provide for a prepaid monthly
fixed capitation payment on a per member basis to Suburban by the HMO for plan
enrollees.
The majority of the HMO contracts are full-risk or modified full-risk
contracts. Under a full-risk contract, Suburban assumes the obligation of
providing all healthcare services to enrollees and is obligated
F-43
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
3. REVENUES: (CONTINUED)
to reimburse outside providers for services rendered to enrollees. Generally,
such payments to outside providers are limited to out-of-area services,
emergency services and services not currently offered by Suburban. Modified
full-risk contracts are similar to full-risk contracts except that the HMO is
obligated to pay for out-of-area services.
Suburban has entered into subcapitation agreements with certain of these
outside providers. Under these agreements, Suburban prepays the outside provider
based upon enrollee/participant formulas in which the subprovider assumes the
risk of providing patient care. Additional limitations on losses are provided by
the payment of stop loss reinsurance premiums and through a percentage
limitation on overall savings or losses of the programs.
Suburban has accrued the claims associated with services provided by outside
providers for which Suburban is responsible, and an estimate of incurred but not
reported claims is included in accrued healthcare cost in the accompanying
financial statements.
FEE-FOR-SERVICE
Patient service revenues are recorded in the period in which services are
provided at established rates. Suburban has agreements with third-party payors
that provide payments to Suburban at amounts different from its established
rates. The difference between the established rates and the related payment
amounts are reflected as contractual discounts, as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Fee-for-service, gross.............................. $ 3,434,751 $ 4,464,911 $ 5,038,382
Contractual discounts............................... 698,675 908,223 1,024,875
------------ ------------ ------------
Fee-for-service, net................................ $ 2,736,076 $ 3,556,688 $ 4,013,507
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
A summary of the most significant fee-for-service arrangements is as
follows:
MEDICARE
A significant portion of Suburban's services are provided to Medicare
patients. Payments for Medicare outpatient services which are not
covered under capitated contracts are based on a prevailing fee
schedule. Approximately 3 percent of net patient service revenues were
derived from services provided to fee-for-service Medicare patients in
1993, 1994 and 1995.
MEDICAID
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule.
Approximately 2 percent of net patient service revenues were derived
from services provided to fee-for-service Medicaid patients in 1993,
1994 and 1995.
F-44
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
3. REVENUES: (CONTINUED)
OTHER PAYORS
Suburban has also entered into payment agreements with certain
commercial insurance carriers and preferred provider organizations. The
basis for payment to Suburban under these agreements includes discounts
from established charges.
MAJOR CUSTOMERS
Three customers individually represented more than 10 percent of Suburban's
total net revenue as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Pacificare--Secure Horizons........................................... 26% 26% 26%
Pacificare--Commercial................................................ 12 12 12
Blue Cross--Commercial................................................ 10 10 10
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Buildings and building improvements................................... $ 535,399 $ 912,029
Furniture and equipment............................................... 1,147,343 1,184,512
Building and equipment under capital lease............................ 164,000 3,838,484
------------ ------------
1,846,742 5,935,025
Less--Accumulated depreciation........................................ 829,560 648,028
------------ ------------
$ 1,017,182 $ 5,286,997
------------ ------------
------------ ------------
</TABLE>
5. INCOME TAX EXPENSE:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109). SFAS 109 requires that Suburban follow
the liability method of accounting for deferred income taxes. Differences
between financial reporting and income tax net operating losses are due
primarily to the use of the cash method of accounting for income tax purposes.
F-45
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
5. INCOME TAX EXPENSE: (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
Suburban's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1994 1995
------------- -----------
<S> <C> <C>
Deferred tax assets:
Patient accounts receivable, net................................ $ -- $ 125,300
Allowance for uncollectible accounts............................ 100,102 97,435
Healthcare and other receivables................................ 135,962 24,774
Related party receivables....................................... 104,472 80,192
Accounts payable and accrued expenses........................... -- 41,638
Accrued compensation and related expenses....................... 140,753 157,073
Accrued healthcare costs........................................ -- 101,429
Professional liability.......................................... 142,262 152,800
------------- -----------
Gross deferred tax assets..................................... 623,551 780,641
Deferred tax liabilities:
Prepaid expenses and deposits................................... (35,218) --
Healthcare and other receivables................................ (661,769) (446,516)
Excess tax depreciation......................................... (13,776) (45,073)
Investments..................................................... (165,777) (74,117)
Accrued healthcare costs........................................ (266,824) --
Accounts payable and accrued expenses........................... (53,554) (122,699)
Capital lease................................................... (40,080) (44,405)
------------- -----------
Gross deferred tax liabilities................................ (1,236,998) (732,810)
------------- -----------
Net deferred tax (liability) asset............................ $ (613,447) $ 47,831
------------- -----------
------------- -----------
</TABLE>
The net deferred tax liability is reflected in the accompanying balance
sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
----------- ---------
<S> <C> <C>
Long-term deferred tax asset.......................................... $ 11,160 $ 37,246
Current deferred tax (liability) asset................................ (624,607) 10,585
----------- ---------
$ (613,447) $ 47,831
----------- ---------
----------- ---------
</TABLE>
F-46
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
5. INCOME TAX EXPENSE: (CONTINUED)
The provision (benefit) for income taxes for the three years ended December
31, is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal................................................ $ (19,766) $ (14,447) $ 44,527
State.................................................. (2,824) (2,064) 6,361
Deferred:
Federal................................................ (66,848) 244,281 (578,618)
State.................................................. (9,550) 34,897 (82,660)
---------- ---------- -----------
$ (98,988) $ 262,667 $ (610,390)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The differences between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before taxes were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
Federal tax at statutory rate............................ $ (86,448) $ 225,883 $ (508,743)
Add (deduct):
State income tax, net of federal benefit............... (8,043) 21,341 (49,594)
Other.................................................. (4,497) 15,443 (52,053)
---------- ---------- -----------
$ (98,988) $ 262,667 $ (610,390)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-47
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
UNRELATED 1994 1995
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Note payable, due in monthly installments of $7,066 plus interest through January 1999,
bearing interest at 9.875%............................................................... $ 339,156 $ 261,433
Note payable, due in monthly installments of $5,250 including interest through February
2000, bearing interest at 9.5%; collateralized by accounts receivable and equipment...... -- 218,692
Note payable, due in monthly installments of $1,032 including interest through May 2000,
bearing interest at prime plus 1.5%; collateralized by accounts receivable and
equipment................................................................................ -- 42,958
Note payable, due in monthly installments of $8,060 including interest through October
2000, bearing interest at 8.75%.......................................................... -- 374,799
RELATED PARTY
- ------------------------------------------------------------------------------------------
Note payable, related party, due in monthly installments of $428 including interest
through August 1998, bearing interest at 6%.............................................. 16,835 12,604
---------- ----------
Total long-term debt.................................................................. 355,991 910,486
Less--Current portion..................................................................... 74,867 213,226
---------- ----------
Long-term debt, net of current portion................................................ $ 281,124 $ 697,260
---------- ----------
---------- ----------
</TABLE>
Maturities of long-term debt for the next five years, including current
maturities, are as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 213,226
1997.............................................................. 219,088
1998.............................................................. 229,933
1999.............................................................. 162,305
2000.............................................................. 85,934
Thereafter........................................................ --
---------
Total......................................................... $ 910,486
---------
---------
</TABLE>
7. LEASE COMMITMENTS:
CAPITAL LEASES
Suburban leases certain medical equipment and facilities under agreements
which are classified as capital leases. The equipment leases have original terms
of five years and have either a bargain purchase option or a transfer of title
at the end of the lease. The building lease is with Gateway Properties LLC (see
F-48
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
7. LEASE COMMITMENTS: (CONTINUED)
Note 11) for a term of 21 years. Leased capital assets included in property,
plant and equipment at December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- ------------
<S> <C> <C>
Buildings and leasehold improvements................................ $ -- $ 3,574,605
Furniture and equipment............................................. 164,000 263,879
---------- ------------
164,000 3,838,484
Less--Accumulated amortization...................................... 38,267 162,915
---------- ------------
$ 125,733 $ 3,675,569
---------- ------------
---------- ------------
</TABLE>
OPERATING LEASES
Such lease commitments are primarily for facilities and equipment. Certain
facility leases provide for adjustments relating to the consumer price index and
operating expenses.
MINIMUM LEASE PAYMENTS
Future minimum lease payments, by year and in the aggregate, under
noncancellable capital leases and operating leases with initial or remaining
terms of one year or more consist of the following at December 31, 1995.
<TABLE>
<CAPTION>
CAPITAL
LEASES OPERATING LEASES
------------- ----------------
<S> <C> <C>
1996........................................................ $ 463,771 $ 324,715
1997........................................................ 463,770 324,715
1998........................................................ 457,582 333,195
1999........................................................ 426,635 333,965
2000........................................................ 416,787 228,570
Thereafter.................................................. 5,877,083 604,333
------------- ----------------
Total minimum lease payments................................ 8,105,628 $ 2,149,493
Amounts representing interest............................... 4,457,408 ----------------
----------------
-------------
Present value of net minimum payments....................... 3,648,220
Current portion............................................. 110,870
-------------
Long-term capitalized lease obligations..................... $ 3,537,350
-------------
-------------
</TABLE>
8. RETIREMENT PLANS:
Suburban has a Profit Sharing Plan (the Plan) in which all employees are
eligible to participate subject to certain eligibility criteria. The Plan is
funded by discretionary employer contributions as determined by the Board of
Directors on an annual basis. The amount of employer contributions, if any, is
allocated to eligible employees based on employee compensation. Suburban's
contributions for the years ended December 31, 1993, 1994 and 1995 were
approximately $340,329, $341,045 and $343,618, respectively.
F-49
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
9. PROFESSIONAL LIABILITY:
Suburban maintains a claims-made professional liability insurance policy.
The policy coverage is $2,000,000 per claim, $4,000,000 aggregate maximum
benefit, for claims made against Suburban and its employees. Accruals for
outstanding claims and the associated deductibles are made in the period in
which the event becomes known. Suburban also accrues an actuarial estimate of
the future liability for claims incurred but not reported prior to the end of
the accounting period.
10. LEGAL PROCEEDINGS:
Suburban is subject to various legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, although the
ultimate dispositions of these proceedings are not determinable, adverse
determinations in any or all of such proceedings would not have a material
adverse effect upon the financial position or results of operations of Suburban.
11. OTHER ASSETS, RELATED PARTIES:
The following are the components of other assets at December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Investment in and loans to Suburban Properties Partnership............ $ 434,603 $ --
Note receivable from Gateway Properties LLC........................... 250,074 185,292
Less--Current portion................................................. (88,631) (48,552)
---------- ----------
$ 596,046 $ 136,740
---------- ----------
---------- ----------
</TABLE>
SUBURBAN PROPERTIES PARTNERSHIP
In 1992, Suburban became a 10 percent equity partner in Suburban Properties
Partnership (SPP). The remaining 90 percent was owned by various shareholders of
Suburban. The investment at December 31, 1994 and 1995 was $146,603 and $0,
respectively. The investment in SPP has been accounted for under the equity
method.
In 1994 Suburban loaned SPP $288,000 to pay off a mortgage. These funds were
repaid upon sale of the partnership assets in 1995. Subsequent to the sale of
the assets, the partnership was liquidated. Suburban realized a capital loss of
$28,624 in 1995 as a result of the liquidation.
GATEWAY PROPERTIES LLC
Gateway Properties LLC (Gateway) is owned by several stockholders of
Suburban. Gateway's assets consist of land and a new building. Throughout 1994
and 1995, Suburban recorded notes receivable for various payments made on behalf
of Gateway. The note receivable at December 31, 1994 and 1995 was $250,074 and
$185,292, respectively. The terms of the note include monthly installments of
principal and interest of $4,878 through August 1999 with interest accruing at 7
percent. Suburban has signed a capital lease to occupy the new clinic building
for a term expiring in August 2015 (see Note 7).
F-50
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
11. OTHER ASSETS, RELATED PARTIES: (CONTINUED)
COORDINATED HEALTH NETWORK, INC.
In December 1993, Suburban became a one-third shareholder in Coordinated
Health Network, Inc. (CHN). CHN was formed to obtain patient contracts under the
Oregon Health Plan and generate materials purchases discounts and has been
accounted for under the equity method. In 1993, 1994, and 1995 Suburban paid
premiums to CHN of $0, $138,823 and $665,755, respectively and CHN paid Suburban
$0, $6,911 and $87,144 in 1993, 1994, and 1995, respectively, for claims. CHN
legally dissolved in 1996.
STOCK SUBSCRIPTIONS
Suburban maintains various agreements with stockholders for their purchase
of common stock. The notes mature at various stages through the year 2008.
12. SUBSEQUENT EVENTS:
PHYSICIAN PARTNERS, INC.
The Board of Directors of HealthFirst has approved a Reorganization and
Merger Agreement (the Agreement) dated July 29, 1996 together with the Boards of
The Corvallis Clinic, P.C. and the Medford Clinic, P.C.; and Physician Partners,
Inc. (PPI), a newly formed company. This Agreement is subject to the approval of
the shareholders of the three medical groups.
This transaction would result in a separation of operations of the three
founding medical groups between medical professional services activities (i.e.,
providers and medical service staff) and the physician practice management
activities of the business. The professional services activities would be spun
off into newly formed professional corporations (New PCs). The physician
practice management business, along with substantially all of the assets and
liabilities of the three founding medical groups, i.e., accounts receivable,
property, plant, equipment, contracts, payables, accruals and debt, would be
transferred to PPI. When the transaction becomes effective, the shareholders of
the existing founding clinics will become the original shareholders of PPI.
An integral part of the reorganization is a 40-year management agreement
whereby PPI would provide physician practice management services to the New PCs.
Services to be provided would include management and administrative services,
capital resources, facilities, equipment and supplies.
As consideration, PPI would be entitled to (a) reimbursement of all
managerial costs and expenses (Manager's Expenses) incurred by PPI and (b) a
management fee equal to 16 percent of the Distributable Profit Amount (defined
as (i) gross revenues, booked on an accrual basis and subtracting contractual
discounts and bad debts, received by PPI or the New PCs relating to services
provided by the New PCs less (ii) Manager's Expense).
The New PCs would be responsible for providing medical services and the
related costs for provider compensation and benefits.
The reorganization Agreement contains a provision which would allow for any
of the three founding medical groups to make a distribution to its shareholders
if its shareholders' equity at June 30, 1996 exceeded a minimum threshold amount
as defined in the Agreement.
F-51
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
12. SUBSEQUENT EVENTS: (CONTINUED)
The parties to the reorganization transaction will receive an opinion from
tax counsel that for federal income tax purposes, it is more likely than not
that the reorganization will be a tax-free transaction. No ruling will be
requested from the Internal Revenue Service regarding the tax consequences of
the transaction. If the IRS or tax court were to determine that the transactions
were not tax free, there would be significant adverse tax consequence to the
parties to the transaction and their respective shareholders.
The reorganization Agreement contemplates that each of the three founding
medical groups will adopt a stock option plan for certain of its employees and
grant new options to purchase shares of its capital stock. Such options would
then be converted into an option to purchase PPI stock.
In anticipation of the consummation of the reorganization transaction,
various individuals have entered into Employment Agreements with PPI which
provide for base compensation, incentive bonuses, stock options and awards,
termination benefits and, in certain cases, severance compensation in the event
the transaction is not consummated prior to January 31, 1997. The obligations of
PPI under certain of these agreements are guaranteed by the three founding
medical groups.
In connection with the reorganization transaction, the three founding
medical groups have entered into an Expense Sharing Agreement which establishes
the basis upon which certain costs incurred in connection with the transactions
are to be allocated between the three groups.
In accordance with the terms of the reorganization Agreement, if one of the
parties terminates the Agreement, in certain circumstances, it may be liable to
the other parties to pay all of their expenses incurred in connection with the
transaction.
F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
The Corvallis Clinic, P.C.:
We have audited the accompanying balance sheets of The Corvallis Clinic,
P.C. (an Oregon professional corporation) as of November 30, 1994 and 1995, and
the related statements of operations, accumulated deficit and cash flows for
each of the years in the three year period ended November 30, 1995. These
financial statements are the responsibility of Corvallis' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Corvallis Clinic, P.C.
as of November 30, 1994 and 1995, and the results of its operations and its cash
flows for each of the years in the three year period ended November 30, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
September 6, 1996
F-53
<PAGE>
THE CORVALLIS CLINIC, P.C.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------------- JUNE 30, 1996
1994 1995 --------------
-------------- -------------- (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 291,561 $ 176,812 $ 71,492
Patient accounts receivable, net of allowances for contractual
discounts and uncollectible accounts of $2,062,000, $1,992,000
and $2,627,000 at November 30, 1994 and 1995, and June 30, 1996,
respectively.................................................... 4,667,634 4,303,960 5,207,439
Healthcare and other receivables.................................. 1,605,116 1,179,380 713,457
Inventories of drugs and supplies................................. 256,843 224,065 184,172
Prepaid expenses and deposits..................................... 407,325 479,264 148,205
-------------- -------------- --------------
Total current assets.......................................... 7,228,479 6,363,481 6,324,765
-------------- -------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and
amortization of $6,989,970, $7,533,789 and $8,426,329 at November
30, 1994 and 1995, and June 30, 1996, respectively................ 14,157,004 19,533,621 19,442,685
-------------- -------------- --------------
OTHER ASSETS:
Property held for future expansion................................ 211,958 -- --
Investments in affiliates......................................... 186,421 561,668 930,425
Other............................................................. 23,884 89,882 29,624
-------------- -------------- --------------
422,263 651,550 960,049
-------------- -------------- --------------
Total assets.................................................. $ 21,807,746 $ 26,548,652 $ 26,727,499
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES, REDEEMABLE STOCK AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt, and capital lease and direct
finance lease obligation........................................ $ 153,534 $ 531,934 $ 562,328
Line of credit.................................................... -- 1,409,000 3,220,000
Drafts payable.................................................... -- -- 92,873
Accounts payable and accrued expenses............................. 1,631,842 2,055,262 864,611
Intercompany payable.............................................. -- -- 28,037
Income taxes payable.............................................. -- 32,215 --
Accrued healthcare costs.......................................... 481,435 1,280,367 2,267,284
Accrued compensation and related expenses......................... 4,911,353 1,909,124 667,877
Deferred revenue.................................................. 346,615 396,747 390,131
-------------- -------------- --------------
Total current liabilities..................................... 7,524,779 7,614,649 8,093,141
-------------- -------------- --------------
LONG-TERM DEBT, net of current portion.............................. 8,309,588 729,453 553,801
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of current
portion........................................................... 155,449 14,258,343 14,098,119
DEFERRED COMPENSATION AND OTHER..................................... 1,489,317 1,629,848 1,960,361
COMMITMENTS AND CONTINGENCIES
REDEEMABLE STOCKS................................................... 4,787,559 5,659,948 6,485,621
ACCUMULATED DEFICIT................................................. (458,946) (3,343,589) (4,463,544)
-------------- -------------- --------------
Total liabilities, redeemable stock and accumulated deficit... $ 21,807,746 $ 26,548,652 $ 26,727,499
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-54
<PAGE>
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, SEVEN MONTHS ENDED JUNE 30,
--------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Fee-for-service, net............................ $ 16,422,001 $ 19,545,575 $ 20,704,589 $ 9,450,049 $ 10,849,898
Prepaid healthcare, net......................... 13,516,634 15,798,726 18,469,738 12,684,605 13,179,432
------------- ------------- ------------- ------------- -------------
Net revenues................................ 29,938,635 35,344,301 39,174,327 22,134,654 24,029,330
Less--Provider compensation and benefits........ 7,121,963 13,729,125 13,209,215 7,558,169 6,342,088
------------- ------------- ------------- ------------- -------------
Net revenues less compensation to
providers................................. 22,816,672 21,615,176 25,965,112 14,576,485 17,687,242
------------- ------------- ------------- ------------- -------------
EXPENSES:
Clinic salaries, wages and benefits............. 10,175,248 10,403,834 12,579,457 6,916,412 7,749,666
Purchased medical services...................... 2,656,090 3,081,120 4,716,727 2,997,495 3,695,906
Medical and office supplies..................... 3,014,285 3,327,093 3,842,572 1,975,338 2,587,202
General and administrative expenses............. 2,435,511 3,157,030 3,560,219 1,626,774 1,723,268
Lease and rent expense.......................... 176,708 177,594 197,603 134,689 66,341
Provision for uncollectible accounts............ 1,032,860 1,181,471 1,767,545 682,836 660,019
Depreciation and amortization................... 668,210 1,005,715 1,114,947 576,326 892,544
------------- ------------- ------------- ------------- -------------
Total operating expenses.................... 20,158,912 22,333,857 27,779,070 14,909,870 17,374,946
------------- ------------- ------------- ------------- -------------
Operating profit (loss)..................... 2,657,760 (718,681) (1,813,958) (333,385) 312,296
OTHER INCOME (EXPENSE):
Interest income................................. -- 55,468 192,523 164,885 26,154
Interest expense................................ (639,397) (780,123) (1,223,370) (731,331) (687,329)
Equity in income of affiliates.................. 92,738 107,332 232,428 136,804 215,909
Other........................................... (171,884) 58,852 505,198 20,033 62,931
------------- ------------- ------------- ------------- -------------
Net income (loss) before income taxes....... 1,939,217 (1,277,152) (2,107,179) (742,994) (70,039)
------------- ------------- ------------- ------------- -------------
INCOME TAX (BENEFIT) EXPENSE...................... 759,374 -- -- -- --
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS)................................. $ 1,179,843 $ (1,277,152) $ (2,107,179) $ (742,994) $ (70,039)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-55
<PAGE>
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF ACCUMULATED DEFICIT
<TABLE>
<S> <C>
BALANCE, November 30, 1992...................................................... $ 651,031
Redemption of common stock.................................................... (7,760)
Accretion of common stock..................................................... (449,348)
Net income.................................................................... 1,179,843
--------------
BALANCE, November 30, 1993...................................................... 1,373,766
Redemption of common stock.................................................... (44,000)
Accretion of common stock..................................................... (511,560)
Net loss...................................................................... (1,277,152)
--------------
BALANCE, November 30, 1994...................................................... (458,946)
Accretion of common stock..................................................... (777,464)
Net loss...................................................................... (2,107,179)
--------------
BALANCE, November 30, 1995...................................................... (3,343,589)
Accretion of common stock (unaudited)......................................... (830,298)
Costs incurred related to PPI transaction (unaudited)......................... (219,618)
Net loss (unaudited).......................................................... (70,039)
--------------
BALANCE, June 30, 1996 (unaudited).............................................. $ (4,463,544)
--------------
--------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-56
<PAGE>
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED NOVEMBER 30, JUNE 30,
--------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 1,179,843 $ (1,277,152) $ (2,107,179) $ (742,994) $ (70,039)
Adjustment to reconcile net income (loss) to net
cash provided by operating activities--
Depreciation and amortization................. 668,210 1,005,715 1,114,947 576,326 892,544
Equity in income of affiliates................ (92,738) (107,332) (232,428) (136,804) (468,757)
Loss on sale of property, plant and
equipment................................... -- 164,366 -- -- --
Deferred taxes................................ 698,864 -- -- -- --
Changes in operating assets and liabilities:
Patient accounts receivable, net............ (654,098) (327,642) 363,674 (273,638) (903,479)
Healthcare and other receivables............ (1,032,621) 110,955 425,736 779,052 465,923
Inventories of drugs and supplies........... (5,571) (13,138) 32,778 (42,550) 39,893
Prepaid expenses and deposits............... (70,945) (66,424) (71,939) 90,045 331,059
Other assets................................ -- (23,884) (65,998) (65,772) 60,258
Drafts payable.............................. -- -- -- 79,074 92,873
Accounts payable and accrued expenses....... 269,608 417,478 423,420 (575,040) (1,190,651)
Income taxes payable........................ -- -- 32,215 -- (32,215)
Intercompany payable........................ -- -- -- -- 28,037
Accrued healthcare costs.................... (84,561) 371,470 798,932 505,891 986,917
Accrued compensation and related expenses... (425,290) 1,319,217 (3,002,229) (3,769,578) (1,241,247)
Deferred revenue............................ 82,009 (28,163) 50,132 (6,417) (6,616)
Deferred compensation....................... 566,284 100,218 (1,969) 8,864 (19,487)
Professional liability...................... -- 27,450 142,500 142,500 350,000
------------- ------------- ------------- ------------- -------------
Net cash used in operating activities....... 1,098,994 1,673,134 (2,097,408) (3,431,041) (684,987)
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment...... (6,820,505) (3,105,891) (3,492,571) (1,889,205) (801,608)
Purchases of investments........................ -- -- (123,673) (5,000) --
Cash distributions received from investments.... 48,000 19,408 400,000 75,000 100,000
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities....... (6,772,505) (3,086,483) (3,216,244) (1,819,205) (701,608)
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings under line of
credit agreement.............................. -- -- 1,409,000 1,100,000 1,811,000
Proceeds from issuance of long-term debt........ 4,710,591 -- 1,200,000 1,200,000 --
Principal payments on long-term debt............ (70,960) (140,712) (239,408) (110,186) (305,482)
Proceeds from issuance of common stock.......... 393,432 18,000 -- -- --
Proceeds from issuance of preferred stock....... 235,000 310,000 -- -- --
Payments for redemption of common stock......... (79,972) (69,000) (23,000) -- (23,000)
Payments for redemption of preferred stock...... (23,000) (48,000) (19,000) -- (19,000)
Proceeds from repayments of notes receivable
from stockholders............................. 137,266 143,549 136,925 106,723 37,375
Cash received in formation of HealthCare
Partners, LLC................................. -- -- 2,734,386 2,734,386 --
Costs incurred related to PPI transaction....... -- -- -- -- (219,618)
------------- ------------- ------------- ------------- -------------
Net cash provided by financing activities... 5,302,357 213,837 5,198,903 5,030,923 1,281,275
------------- ------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH................... (371,154) (1,199,512) (114,749) (219,323) (105,320)
CASH, beginning of year........................... 1,862,227 1,491,073 291,561 291,561 176,812
------------- ------------- ------------- ------------- -------------
CASH, end of year................................. $ 1,491,073 $ 291,561 $ 176,812 $ 72,238 $ 71,492
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................... $ 680,280 $ 780,123 $ 891,190 $ 717,213 $ 140,042
Cash paid (received) for income taxes........... -- 74,420 (41,558) -- 20,000
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1995, Corvallis formed a limited liability company by contributing
certain real property and associated debt in exchange for a 50 percent ownership
interest in the new entity. See Note 5.
Notes receivable from shareholders for purchase of stock during 1993, 1994
and 1995 were $315,324, $399,150 and $23,000, respectively.
The accompanying notes are an integral part of these statements.
F-57
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. BUSINESS AND ORGANIZATION:
The Corvallis Clinic, P.C. (Corvallis), an Oregon professional corporation,
is a multi-specialty medical clinic. Corvallis was founded in 1947 with the
belief that group practice offers the best means of promoting and maintaining
the highest standards of medical care.
As of June 30, 1996, Corvallis consists of approximately 513 employees and
97 professional providers who offer a wide range of primary and specialty care.
In addition, Corvallis offers ancillary services such as Physical Therapy,
Optical, Pharmacy, Laboratory and Imaging.
The majority of Corvallis operations are located in two facilities in
Corvallis, Oregon. In addition, Corvallis operates four satellite offices:
Albany Family Medicine, Corvallis Family Medicine, Philomath Family Medicine and
Research Park. A significant change in the demographics of this area may have an
adverse impact on the business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
Cash equivalents consist of all highly liquid investments with original
maturities of three months or less.
CONCENTRATION OF CREDIT RISK
Corvallis extends credit to patients covered by insurance programs such as
governmental programs (Medicare and Medicaid) and private programs. Corvallis
manages credit risk with the various public and private insurance providers, as
deemed appropriate by management. Allowances for doubtful accounts have been
made for potential losses, where appropriate.
INVENTORIES OF DRUGS AND SUPPLIES
Inventories are stated at the lower of cost or market, determined by the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Maintenance, repairs and
minor replacements are expensed as incurred. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts and any gain or loss on disposition is recorded as
other income or expense.
Depreciation is computed using both accelerated and straight-line methods
over the estimated useful lives of the respective assets. Equipment under
capital lease is amortized using both accelerated and straight-line methods over
the shorter of the period of the lease term or the estimated useful life of the
equipment. Estimated lives are as follows:
<TABLE>
<S> <C>
Building and building improvements.................................... 7-40 years
Furniture and equipment............................................... 5-15 years
</TABLE>
F-58
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROVIDER COMPENSATION AND BENEFITS
Provider compensation and benefits consists of the direct costs of patient
care providers such as physicians and other allied health professionals. A
substantial portion of these costs are paid to providers who are stockholders.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, patient receivables,
accounts payable and accrued liabilities are a reasonable estimate of their fair
value based on the short maturities of these instruments.
Interest rates that are currently available to Corvallis for issuance of
debt with similar terms and remaining maturities were used to estimates fair
value for debt issues. The current carrying value of debt approximates fair
value.
Corvallis does not hold or issue financial instruments or derivative
financial instruments for trading purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard Number 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
establishes accounting standards for impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used, as well as for long-lived assets and certain identifiable intangibles to
be disposed of. Corvallis adopted the new standard in 1996. The effect of the
adoption was not material to Corvallis' financial position or results of
operations.
NOTES RECEIVABLE FROM STOCKHOLDERS
Corvallis maintains various agreements with stockholders for their purchase
of common stock. The notes bear interest at 8.66 percent and mature at various
stages through the year 2006.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the interim periods ended June 30, 1995 and
1996 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
Corvallis' management, the unaudited interim financial information includes all
adjustments, consisting only of
F-59
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
normal recurring adjustments, necessary for a fair presentation. Results of
operations for the interim periods are not necessarily indicative of the results
of operations for the respective full years.
3. REVENUES:
Corvallis reports its revenues in accordance with the methodologies as
discussed below:
PREPAID HEALTHCARE
Corvallis contracts with various Health Maintenance Organizations (HMOs) to
provide care to plan enrollees. These programs provide for a prepaid monthly
fixed capitation payment on a per member basis to Corvallis by the HMO for plan
enrollees.
The majority of the HMO contracts are full-risk or modified full-risk
contracts. Under a full-risk contract, Corvallis assumes the obligation of
providing all healthcare services to enrollees and is obligated to reimburse
outside providers for services rendered to enrollees. Generally, such payments
to outside providers are limited to out-of-area services, emergency services and
services not currently offered by Corvallis. Modified full-risk contracts are
similar to full-risk contracts except that the HMO is obligated to pay for
out-of-area services.
Corvallis has entered into subcapitation agreements with certain of these
outside providers. Under these agreements, Corvallis prepays the outside
provider based upon enrollee/participant formulas in which the subprovider
assumes the risk of providing patient care. Additional limitations on losses are
provided by the payment of stop loss reinsurance premiums and through a
percentage limitation on overall savings or losses of the programs.
Corvallis has accrued the claims associated with services provided by
outside providers for which Corvallis is responsible, and an estimate of
incurred but not reported claims is included in accrued healthcare cost in the
accompanying financial statements.
FEE-FOR-SERVICE
Patient service revenues are recorded in the period in which services are
provided at established rates. Corvallis has agreements with third-party payors
that provide payments to Corvallis at amounts different from its established
rates. The difference between the established rates and the related payment
amounts are reflected as contractual discounts, as shown below:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED
NOVEMBER 30, JUNE 30,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fee-for-service, gross............... $ 21,434,661 $ 25,129,788 $ 25,778,976 $ 13,003,008 $ 12,997,574
Contractual discounts................ 5,012,660 5,584,213 5,074,387 3,552,959 2,147,676
------------- ------------- ------------- ------------- -------------
Fee-for-service, net................. $ 16,422,001 $ 19,545,575 $ 20,704,589 $ 9,450,049 $ 10,849,898
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-60
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
3. REVENUES: (CONTINUED)
A summary of the most significant fee-for-service arrangements is as
follows:
MEDICARE
A significant portion of Corvallis' services are provided to Medicare
patients. Payments for Medicare outpatient services which are not
covered under capitated contracts are based on a prevailing fee
schedule. Approximately 17, 18, 15 and 9 (unaudited) percent of net
patient service revenues were derived from services provided to
fee-for-service Medicare patients in 1993, 1994, 1995 and for the seven
months ended June 30, 1996, respectively.
MEDICAID
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule.
Approximately 6, 5, 3 and 1 (unaudited) percent of net patient service
revenues were derived from services provided to fee-for-service Medicaid
patients in 1993, 1994, 1995 and the seven months ended June 30, 1996,
respectively.
OTHER PAYORS
Corvallis has also entered into payment agreements with certain
commercial insurance carriers and preferred provider organizations. The
basis for payment to Corvallis under these agreements includes discounts
from established charges.
MAJOR CUSTOMERS
Four customers individually represented more than 10 percent of
Corvallis' total net revenue as follows:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
------------------------------------- SEVEN MONTHS ENDED
1993 1994 1995 JUNE 30, 1996
----- ----- ----- -------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Pacificare--Commercial.............................. 23% 19% 23% 20%
Pacificare--Secure Horizons......................... 15 13 16 11
SelectCare.......................................... -- -- 10 12
Oregon Health Plan.................................. -- -- 11 6
</TABLE>
F-61
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment includes the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land and land improvements............................ $ 454,609 $ 666,565 $ 666,565
Buildings and leasehold improvements.................. 14,289,703 14,109,506 14,121,183
Furniture and equipment............................... 5,706,704 7,016,184 7,806,111
Construction in progress.............................. 695,958 5,275,155 5,275,155
------------- ------------- -------------
21,146,974 27,067,410 27,869,014
Less--Accumulated depreciation........................ (6,989,970) (7,533,789) (8,426,329)
------------- ------------- -------------
$ 14,157,004 $ 19,533,621 $ 19,442,685
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
5. INCOME TAXES:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109). SFAS 109 requires that Corvallis follow
the liability method of accounting for deferred income taxes. Differences
between financial reporting and income tax net operating losses are due
primarily to the use of the cash method of accounting for income tax purposes.
Corvallis has adopted a December 31 year-end for income tax purposes.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
Corvallis' deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Cash to accrual adjustments......................... $ 4,578,708 $ 4,201,341 $ 4,640,397
Property related book to tax differences............ 183,553 -- --
Net operating loss.................................. -- 1,134,819 1,134,819
Other............................................... 30,250 35,564 --
------------- ------------- -------------
Gross deferred tax assets......................... 4,792,511 5,371,724 5,775,216
Less--Valuation allowance............................. (1,318,932) (2,417,167) (2,417,167)
------------- ------------- -------------
Net deferred tax asset............................ 3,473,579 2,954,557 3,358,049
------------- ------------- -------------
Deferred tax liabilities:
Cash to accrual adjustments......................... (3,473,579) (2,435,644) (2,839,136)
Property related book to tax differences............ -- (518,913) (518,913)
------------- ------------- -------------
Gross deferred tax liabilities.................... (3,473,579) (2,954,557) (3,358,049)
------------- ------------- -------------
Net deferred tax (liability) asset................ $ -- $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-62
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
5. INCOME TAXES: (CONTINUED)
Due to the differing fiscal periods, the federal and state net operating
loss carryforwards reported on the respective tax returns will differ from the
amounts reported above.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED NOVEMBER 30, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal................................. $ -- $ -- $ -- $ -- $ --
State................................... -- -- -- -- --
Deferred:
Federal................................. 664,453 -- -- -- --
State................................... 94,921 -- -- -- --
--------- --------- --------- --------- ---------
$ 759,374 $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The differences between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before taxes were as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED NOVEMBER 30, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal tax at statutory rate.......... $ 678,726 $(447,003) $(737,513) $(260,048) $ (24,514)
Add (deduct):
State income tax, net of federal
benefit............................ 61,699 -- -- -- --
Investments.......................... 17,940 (730,133) (214,896) (125,356) --
Other................................ 1,009 (141,796) (145,826) (27,188) 24,514
Change in valuation allowance........ -- 1,318,932 1,098,235 412,592 --
--------- --------- --------- --------- ---------
$ 759,374 $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-63
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Unrelated
Note payable interest at 10%, payable in monthly
installments of $30,551 through February 1999, secured
by equipment........................................... $ -- $ 1,007,818 $ 848,816
Mortgage payable, interest at 9.5%, payable in monthly
installments of $55,403 through February 2018, secured
by real property....................................... 6,182,436 -- --
Mortgage payable, interest at 8.875%, payable in monthly
installments of $12,045 through July 2017, secured by
real property.......................................... 1,409,086 -- --
Mortgage payable, interest at 9.75%, payable in monthly
installments of $5,703 through January 2003 at which
time principal amount of $540,995 is due, secured by
real and personal property............................. 629,118 -- --
Mortgage payable, interest at 9.75%, payable in monthly
installments of $1,913 through May 2017, secured by
real property.......................................... 195,256 -- --
------------- ------------- -------------
8,415,896 1,007,818 848,816
Less--Current portion.................................... (106,308) (278,365) (295,015)
------------- ------------- -------------
Long-term debt, net of current portion................. $ 8,309,588 $ 729,453 $ 553,801
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Scheduled principal repayments on long-term debt as of November 30, 1995 are
as follows:
<TABLE>
<S> <C>
1996.......................... $ 278,365
1997.......................... 307,514
1998.......................... 339,714
1999.......................... 82,225
2000.......................... --
Thereafter.................... --
-------------
$ 1,007,818
-------------
-------------
</TABLE>
LINES OF CREDIT
Corvallis maintains a revolving line-of-credit agreement with a bank
providing up to $2,500,000, secured by accounts receivable and inventory.
Corvallis maintains a second revolving line-of-credit agreement with a bank
providing up to $1,400,000 secured by business equipment. At June 30, 1996,
F-64
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
6. LONG-TERM DEBT: (CONTINUED)
borrowings outstanding were $3,220,000. These lines of credit bear interest at
the lender's prime rate (8.25 percent at June 30, 1996) and are due on demand.
7. LEASE COMMITMENTS:
CAPITAL LEASE
Corvallis leases certain equipment under an agreement which is classified as
a capital lease. The lease has an original term of five years and includes a
bargain purchase option. Lease equipment included in property, plant and
equipment at November 30, 1994 and 1995 and June 30, 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Equipment.............................................. $ 260,255 $ 260,255 $ 260,255
Less--Accumulated amortization......................... (69,401) (121,452) (151,815)
---------- ----------- -----------
$ 190,854 $ 138,803 $ 108,440
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
OPERATING LEASES
Leases that do not meet the criteria for capitalization are classified as
operating leases. Such lease commitments are primarily for facilities and
equipment and the related rentals are charged to operations as incurred.
FUTURE MINIMUM LEASE PAYMENTS
Future minimum lease payments by year and in the aggregate, under
noncancellable capital leases and operating leases with initial or remaining
terms of one year or more consist of the following at November 30, 1995:
<TABLE>
<CAPTION>
CAPITAL LEASE OPERATING LEASES
------------- ----------------
<S> <C> <C>
1996......................................................... $ 67,864 $ 77,977
1997......................................................... 67,864 74,897
1998......................................................... 39,588 74,897
1999......................................................... -- 27,215
2000......................................................... -- 22,880
Thereafter................................................... -- 45,380
------------- --------
Total minimum lease payments................................. 175,316 $ 323,246
Amounts representing interest................................ (19,867) --------
--------
-------------
Present value of minimum payments............................ 155,449
Current portion.............................................. (52,841)
-------------
Long-term capitalized lease obligations...................... $ 102,608
-------------
-------------
</TABLE>
F-65
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
7. LEASE COMMITMENTS: (CONTINUED)
DIRECT FINANCING LEASE OBLIGATION
In June of 1995, Corvallis contributed land, buildings, construction in
process and related notes payable to HealthCare Partners, LLC (see Note 12). At
the date of transfer, Corvallis entered into 30-year lease agreements for the
Asbury, Aumann, CFM and PFM buildings and a 5-year lease agreement for the
Albany building. Monthly rental payments under these leases are $191,581. The
assets were sold under a sale/leaseback arrangement and, therefore, this is
being accounted for as a financing transaction wherein the assets remain on the
books and continue to be depreciated. Corvallis recorded a direct financing
lease obligation representing the underlying obligations assumed by the LLC as
part of the transaction.
The liability for this lease obligation was $14,356,463 at November 30, 1995
and $14,245,372 at June 30, 1996. Scheduled principal payments at November 30,
1995 are as follows:
<TABLE>
<S> <C>
1996.......................... $ 200,728
1997.......................... 219,252
1998.......................... 240,779
1999.......................... 264,423
2000.......................... 290,394
Thereafter.................... 13,140,887
-------------
$ 14,356,463
-------------
-------------
</TABLE>
8. PROFESSIONAL LIABILITY:
Corvallis maintains a claims-made professional liability insurance policy.
The policy coverage is $5,000,000 per claim, with no aggregate maximum limit for
claims made against Corvallis and its employees. Accruals for outstanding claims
and the associated deductibles are made in the period in which the event becomes
known. Corvallis also accrues an actuarial estimate of the future liability for
claims incurred but not reported prior to the end of the accounting period.
9. REDEEMABLE STOCK:
Corvallis has three classes of stock which are redeemable at the option of
the shareholders upon retirement, termination of employment and certain other
events. A summary of the activity in these stock
F-66
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
9. REDEEMABLE STOCK: (CONTINUED)
accounts for the period November 30, 1992 through June 30, 1996, together with
other information, is presented below:
<TABLE>
<CAPTION>
CLASS A CLASS B
VOTING PREFERRED VOTING COMMON
-------------------------- --------------------------
SHARES CARRYING SHARES CARRYING
ISSUED VALUE ISSUED VALUE
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, November 30, 1992........................ 48 $ 718,851 9,755 $ 1,944,638
Stock issued.................................... 16 368,000 1,954 340,756
Stock redeemed.................................. (2) (46,000) (374) (26,212)
Accretion....................................... -- 76,785 -- 372,563
Payments of notes receivable.................... -- -- -- --
--- ------------- ---------- -------------
BALANCE, November 30, 1993........................ 62 1,117,636 11,335 2,631,745
Stock issued.................................... 9 207,000 700 210,150
Stock redeemed.................................. (3) (25,000) -- --
Accretion....................................... -- 58,817 -- 452,743
Payments of notes receivable.................... -- -- -- --
--- ------------- ---------- -------------
BALANCE, November 30, 1994........................ 68 1,358,453 12,035 3,294,638
Stock issued.................................... 1 23,000 -- --
Stock redeemed.................................. (1) (23,000) -- --
Accretion....................................... -- 5,661 -- 771,803
Payments of notes receivable.................... -- -- -- --
--- ------------- ---------- -------------
BALANCE, November 30, 1995........................ 68 1,364,114 12,035 4,066,441
Stock redeemed.................................. (1) (23,000) -- --
Accretion....................................... -- 54,026 -- 776,272
Payments of notes receivable.................... -- -- -- --
--- ------------- ---------- -------------
BALANCE, June 30, 1996 (unaudited)................ 67 $ 1,395,140 12,035 $ 4,842,713
--- ------------- ---------- -------------
--- ------------- ---------- -------------
Current redemption value per share................ $ 23,000 $ 595
------------- -------------
------------- -------------
Redemption value for shares issued................ $ 1,541,000 $ 7,160,825
------------- -------------
------------- -------------
Total authorized shares........................... 200 25,000
--- ----------
--- ----------
<CAPTION>
CLASS C
NONVOTING PREFERRED
NOTES
------------------------- RECEIVABLE
SHARES CARRYING FROM
ISSUED VALUE STOCKHOLDERS TOTAL
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
BALANCE, November 30, 1992........................ 4,020 $ 402,000 $ (307,873) $ 2,757,616
Stock issued.................................... 2,350 235,000 (315,324) 628,432
Stock redeemed.................................. (230) (23,000) -- (95,212)
Accretion....................................... -- -- -- 449,348
Payments of notes receivable.................... -- -- 137,266 137,266
---------- ------------ ------------- ------------
BALANCE, November 30, 1993........................ 6,140 614,000 (485,931) 3,877,450
Stock issued.................................... 3,100 310,000 (399,150) 328,000
Stock redeemed.................................. (480) (48,000) -- (73,000)
Accretion....................................... -- -- -- 511,560
Payments of notes receivable.................... -- -- 143,549 143,549
---------- ------------ ------------- ------------
BALANCE, November 30, 1994........................ 8,760 876,000 (741,532) 4,787,559
Stock issued.................................... -- -- (23,000) --
Stock redeemed.................................. (190) (19,000) -- (42,000)
Accretion....................................... -- -- -- 777,464
Payments of notes receivable.................... -- -- 136,925 136,925
---------- ------------ ------------- ------------
BALANCE, November 30, 1995........................ 8,570 857,000 (627,607) 5,659,948
Stock redeemed.................................. (190) (19,000) -- (42,000)
Accretion....................................... -- -- -- 830,298
Payments of notes receivable.................... -- -- 37,375 37,375
---------- ------------ ------------- ------------
BALANCE, June 30, 1996 (unaudited)................ 8,380 $ 838,000 $ (590,232) $ 6,485,621
---------- ------------ ------------- ------------
---------- ------------ ------------- ------------
Current redemption value per share................ $ 100
------------
------------
Redemption value for shares issued................ $ 838,000
------------
------------
Total authorized shares........................... 100,000
----------
----------
</TABLE>
The carrying value of the Class A and Class B shares are being increased
(accreted) to the redemption price using the effective interest rate through the
earliest estimated redemption date. Currently, none of the shares are redeemable
at a date certain. Accordingly, no determination can be made of redemption
requirements for specific years in the future.
10. DEFERRED COMPENSATION:
Corvallis provides compensation to eligible shareholders who retire based
upon average shareholder income, as defined in the Employment Agreement, for the
first three years following retirement. Provider/ shareholder retirees who have
20 1/2 years of service and attain age 65 while in service with Corvallis are
eligible to receive deferred retirement compensation.
F-67
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
11. COMMITMENTS AND CONTINGENCIES:
CONSTRUCTION IN PROGRESS
Corvallis is presently engaged in renovation and expansion projects of two
facilities with estimated remaining costs of approximately $450,000 at June 30,
1996. These projects are being financed through HealthCare Partners, LLC.
LEGAL PROCEEDINGS
Corvallis is subject to various legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, although the
ultimate dispositions of these proceedings are not determinable, adverse
determinations in any or all of such proceedings would not have a material
adverse effect upon the financial position or results of operations of
Corvallis.
12. INVESTMENTS IN AFFILIATES:
The Company's investments in affiliates consist of investments in various
entities which are accounted for on the equity method. The names of these
entities, carrying values and the percent of ownership held by Corvallis are
summarized below:
<TABLE>
<CAPTION>
CARRYING VALUE AT
-----------------------------------
NOVEMBER 30,
---------------------- JUNE 30,
INVESTEE PERCENT OWNED 1994 1995 1996
- ----------------------------------------------- ------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Corvallis MRI.................................. 33% $ 186,421 $ 231,058 $ 274,145
HealthCare Partners, LLC....................... 50 -- 259,319 586,489
Healthquest.................................... 32 -- 71,291 69,791
---------- ---------- -----------
$ 186,421 $ 561,668 $ 930,425
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Additional information regarding these investments is discussed below.
CORVALLIS MRI:
Corvallis holds a one-third interest in Corvallis MRI, a partnership
organized in 1988 which owns and operates a magnetic resonance imaging (MRI)
scanner. The MRI unit is housed in facilities leased from Good Samaritan
Hospital, another partner, and operated by Corvallis Radiology, P.C., the third
partner.
F-68
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
12. INVESTMENTS IN AFFILIATES: (CONTINUED)
Summarized financial information of Corvallis MRI for its December 31 fiscal
year and June 30 interim period is presented below:
BALANCE SHEET DATA--
<TABLE>
<CAPTION>
AS OF
---------------------------------------------
DECEMBER 31,
-----------------------------
JUNE 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets................................... $ 527,386 $ 618,677 $ 634,064
Fixed assets..................................... 1,554,328 1,288,043 1,171,754
------------- ------------- -------------
Total assets................................. $ 2,081,714 $ 1,906,720 $ 1,805,818
------------- ------------- -------------
------------- ------------- -------------
Current liabilities.............................. $ 325,163 $ 346,383 $ 363,195
Long-term debt................................... 1,132,782 796,735 620,188
Partners' equity................................. 623,769 763,602 822,435
------------- ------------- -------------
Total liabilities and Partners' equity....... $ 2,081,714 $ 1,906,720 $ 1,805,818
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
OPERATIONS DATA--
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 937,736 $ 1,303,800 $ 1,657,619 $ 806,400 $ 848,488
Operating expenses.................. (683,263) (746,580) (834,435) (400,923) (456,941)
Other income (expense).............. 4,008 (83,592) (83,351) (44,479) (32,714)
----------- ------------ ------------ ----------- -----------
$ 258,481 $ 473,628 $ 739,833 $ 360,998 $ 358,833
----------- ------------ ------------ ----------- -----------
----------- ------------ ------------ ----------- -----------
</TABLE>
During 1993, 1994 and 1995, payments to Corvallis MRI for services provided
to Corvallis were $32,401, $65,504 and $61,785, respectively, and $56,499 for
the seven months ended June 30, 1996, and are included in purchased services.
HEALTHCARE PARTNERS, LLC
During the year ended November 30, 1995, Corvallis entered into a joint
venture agreement with Good Samaritan Hospital, Corvallis to form a limited
liability company to own and manage Corvallis' buildings and real properties and
to serve as a vehicle for financing future property expansion for Corvallis.
Corvallis contributed assets and liabilities in exchange for a 50 percent
membership interest in the limited liability company.
The net book value of assets and liabilities contributed by Corvallis was
$13,804,704 for buildings, land and construction in progress and $8,363,298 for
related debt. In addition, Corvallis received $2,734,386 in
F-69
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
12. INVESTMENTS IN AFFILIATES: (CONTINUED)
cash reimbursements for the market value of the above contributed net assets in
excess of the Hospital's contributed equity, as measured at the date of
formation of the limited liability company.
This transaction has been accounted for as a financing due to the continuing
involvement of Corvallis in the assets through its ownership interest in the
limited liability company. Accordingly, the contributed property remains as an
asset of Corvallis. The debt at the transaction date, together with the cash
received for the excess value of the contributed net assets, has been included
in the related financing obligations (see Note 7).
Summarized financial information of HealthCare Partners, LLC for its
December 31, fiscal year and June 30 interim period is presented below:
BALANCE SHEET DATA--
<TABLE>
<CAPTION>
AS OF
-----------------------------
DECEMBER 31, JUNE 30,
1995 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets............................................. $ 276,548 $ 306,153
Financing lease receivable................................. 18,095,340 18,050,586
Property and improvements.................................. 5,357,704 5,876,895
Other assets............................................... 175,414 119,680
------------- -------------
Total assets........................................... $ 23,905,006 $ 24,353,314
------------- -------------
------------- -------------
Current liabilities........................................ $ 1,211,560 $ 1,113,228
Long-term debt............................................. 8,014,916 8,055,859
Members' equity............................................ 14,678,530 15,184,227
------------- -------------
Total liabilities and Members' equity.................. $ 23,905,006 $ 24,353,314
------------- -------------
------------- -------------
</TABLE>
OPERATIONS DATA--
<TABLE>
<CAPTION>
INCEPTION
(JUNE 1
THROUGH SIX MONTHS
DECEMBER 31, ENDED
1995) JUNE 30, 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Revenues............................................ $ 1,257,835 $ 1,257,654
Expenses............................................ 679,981 751,958
------------- -------------
Net income...................................... $ 577,854 $ 505,696
------------- -------------
------------- -------------
</TABLE>
Interest income includes $1,149,055 for the 1995 period and $982,426 for the
six months ended June 30, 1996 relating to the financing lease with Corvallis.
As a substantial portion of the joint venture's income is derived from this
interest income, Corvallis' share of earnings from the joint venture is offset
against interest expense in the accompanying statements of income.
F-70
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
12. INVESTMENTS IN AFFILIATES: (CONTINUED)
Concurrent with the formation of the limited liability company, Corvallis
has entered into a lease agreement relating to buildings and properties which
were contributed to the limited liability company and are occupied by Corvallis.
Future minimum rental commitments under the agreement are approximately
$2,203,000 per year for the first 5 years and approximately $2,054,000 per year
for the next 25 years, subject to fair market value adjustments after the first
five years.
Corvallis has guaranteed approximately $6,100,000 of long-term debt
associated with the above joint venture.
13. RETIREMENT PLANS:
Corvallis has a 401(k) Profit-Sharing Plan (the 401(k) Plan) in which all
employees are eligible to participate subject to certain eligibility criteria.
The 401(k) Plan permits employees to contribute up to 16 percent of their annual
compensation (not to exceed certain annual limits imposed by the Internal
Revenue Code). Corvallis is required to make matching contributions equal to 50
percent of employee contributions up to 8 percent of the employee's
compensation. Corvallis may also make discretionary contributions. Clinic
contributions are 100 percent vested. Corvallis also has a Money-Purchase
Pension Plan (the Pension) in which all employees are eligible to participate
subject to certain eligibility criteria. Corvallis contributes 5.4 percent of
the employee's eligible earnings up to $48,481 and 10.8 percent of eligible
earnings in excess of $48,481. These contributions are 100 percent vested upon
eligibility.
Corvallis' contributions for these plans for the years ended November 30,
1993, 1994 and 1995 and the seven months ended June 30, 1995 and 1996 were
approximately $2,093,000, $1,813,000, $2,010,000, $1,226,000 (unaudited) and
$718,000 (unaudited), respectively.
14. SUBSEQUENT EVENTS:
PHYSICIAN PARTNERS, INC.
The Board of Directors of Corvallis has approved a Reorganization and Merger
Agreement (the Agreement) dated July 29, 1996 together with the Boards of
HealthFirst Medical Group P.C. and the Medford Clinic P.C.; and Physician
Partners, Inc. (PPI), a newly formed company. This Agreement is subject to the
approval of the shareholders of the three medical groups.
This transaction would result in a separation of operations of the three
founding medical groups between medical professional services activities (i.e.,
providers and medical service staff) and the physician practice management
activities of the business. The professional services activities would be spun
off into newly formed professional corporations (New PCs). The physician
practice management business, along with substantially all of the assets and
liabilities of the three founding medical groups, i.e., accounts receivable,
property, plant, equipment, contracts, payables, accruals and debt, would be
transferred to PPI. When the transaction becomes effective, the shareholders of
the existing founding clinics will become the original shareholders of PPI.
An integral part of the reorganization is a 40-year management agreement
whereby PPI would provide physician practice management services to the New PCs.
Services to be provided would include management and administrative services,
capital resources, facilities, equipment and supplies.
F-71
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
14. SUBSEQUENT EVENTS: (CONTINUED)
As consideration, PPI would be entitled to (a) reimbursement of all
managerial costs and expenses (Manager's Expenses) incurred by PPI and (b) a
management fee equal to 16 percent of the Distributable Profit Amount (defined
as (i) gross revenues, booked on an accrual basis and subtracting contractual
discounts and bad debts, received by PPI or the New PCs relating to services
provided by the New PCs less (ii) Manager's Expense).
The New PCs would be responsible for providing medical services and the
related costs for provider compensation and benefits.
The reorganization Agreement contains a provision which would allow for any
of the three founding medical groups to make a distribution to its shareholders
if its shareholders' equity at June 30, 1996 exceeded a minimum threshold amount
as defined in the Agreement.
The parties to the reorganization transaction will receive an opinion from
tax counsel that for federal income tax purposes, it is more likely than not
that the reorganization will be a tax-free transaction. No ruling will be
requested from the Internal Revenue Service regarding the tax consequences of
the transaction. If the IRS or tax court were to determine that the transactions
were not tax free, there would be significant adverse tax consequence to the
parties to the transaction and their respective shareholders.
The reorganization Agreement contemplates that each of the three founding
medical groups will adopt a stock option plan for certain of its employees and
grant new options to purchase shares of its capital stock. Such options would
then be converted into options to purchase PPI stock.
In anticipation of the consummation of the reorganization transaction,
various individuals have entered into Employment Agreements with PPI which
provide for base compensation, incentive bonuses, stock options and awards,
termination benefits and, in certain cases, severance compensation in the event
the transaction is not consummated prior to January 31, 1997. The obligations of
PPI under certain of these agreements are guaranteed by the three founding
medical groups.
In connection with the reorganization transaction, the three founding
medical groups have entered into an Expense Sharing Agreement which establishes
the basis upon which certain costs incurred in connection with the transactions
are to be allocated between the three groups.
In accordance with the terms of the reorganization Agreement, if one of the
parties terminates the Agreement, in certain circumstances, it may be liable to
the other parties to pay all of their expenses incurred in connection with the
transaction.
F-72
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Corvallis MRI:
We have audited the accompanying balance sheets of Corvallis MRI (an Oregon
Partnership) as of December 31, 1995 and 1994, and the related statements of
operations, partners' equity and cash flows for each of the years in the three
year period ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Corvallis MRI as of December
31, 1995 and 1994, and the results of its operations and its cash flows for each
of the years in the three year period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
September 18, 1996
F-73
<PAGE>
CORVALLIS MRI
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1994 1995 1996
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 196,610 $ 140,235 $ 301,574
Accounts receivable (net of allowance for contractual discounts and
doubtful accounts of approximately $94,000, $120,000 and $83,000
at December 31, 1994, 1995 and June 30, 1996, respectively)....... 330,776 444,095 332,201
Related party receivable............................................ -- 22,244 --
Prepaid expenses.................................................... -- 12,103 289
------------ ------------ -------------
Total current assets.............................................. 527,386 618,677 634,064
------------ ------------ -------------
EQUIPMENT............................................................. 1,977,791 1,979,258 2,000,362
Less--Accumulated depreciation...................................... (423,463) (691,215) (828,608)
------------ ------------ -------------
1,554,328 1,288,043 1,171,754
------------ ------------ -------------
Total assets...................................................... $ 2,081,714 $ 1,906,720 $ 1,805,818
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................... $ 11,278 $ 10,336 $ 15,625
Current portion of long-term debt................................... 313,885 336,047 347,570
------------ ------------ -------------
Total current liabilities......................................... 325,163 346,383 363,195
------------ ------------ -------------
LONG-TERM DEBT, LESS CURRENT PORTION.................................. 1,132,782 796,735 620,188
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
Equity--Corvallis Radiology P.C..................................... 207,923 254,534 274,145
Equity--The Corvallis Clinic P.C.................................... 207,923 254,534 274,145
Equity--Samaritan Enterprises....................................... 207,923 254,534 274,145
------------ ------------ -------------
Total partners' equity............................................ 623,769 763,602 822,435
------------ ------------ -------------
Total liabilities and partners' equity............................ $ 2,081,714 $ 1,906,720 $ 1,805,818
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-74
<PAGE>
CORVALLIS MRI
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET PATIENT SERVICE REVENUE...................... $ 937,736 $ 1,303,800 $ 1,657,619 $ 806,400 $ 848,488
EXPENSES:
Operating expenses reimbursed to a related
party........................................ 218,435 208,245 231,205 108,834 131,740
Supplies....................................... 78,704 129,474 159,126 83,231 78,286
Repairs and maintenance........................ 74,693 50,005 136,864 61,051 81,904
Depreciation................................... 189,537 265,278 267,752 133,876 137,393
Other administrative expenses.................. 121,894 93,578 39,488 13,931 27,618
---------- ------------ ------------ ---------- ----------
Total expenses............................... 683,263 746,580 834,435 400,923 456,941
---------- ------------ ------------ ---------- ----------
OPERATING INCOME................................. 254,473 557,220 823,184 405,477 391,547
OTHER INCOME (EXPENSES):
Interest income................................ 6,096 6,519 6,038 2,529 3,453
Interest expense............................... (2,088) (90,111) (89,389) (47,008) (36,167)
---------- ------------ ------------ ---------- ----------
Other income (expenses), net................. 4,008 (83,592) (83,351) (44,479) (32,714)
---------- ------------ ------------ ---------- ----------
Net income................................... $ 258,481 $ 473,628 $ 739,833 $ 360,998 $ 358,833
---------- ------------ ------------ ---------- ----------
---------- ------------ ------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-75
<PAGE>
CORVALLIS MRI
STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
CORVALLIS THE
FRANK RADIOLOGY CORVALLIS SAMARITAN
MOORE M.D. P.C. CLINIC P.C. ENTERPRISES TOTAL
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992....................... $ 57,071 $ 114,142 $ 114,143 $ 95,119 $ 380,475
Allocation of net income....................... 38,772 77,544 77,545 64,620 258,481
Purchase of partnership interest............... (95,843) (22,332) (22,333) (9,492) (150,000)
---------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1993....................... -- 169,354 169,355 150,247 488,956
Allocation of net income....................... -- 157,876 157,876 157,876 473,628
Cash distribution.............................. -- (119,307) (119,308) (100,200) (338,815)
---------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1994....................... -- 207,923 207,923 207,923 623,769
Allocation of net income....................... -- 246,611 246,611 246,611 739,833
Cash distribution.............................. -- (200,000) (200,000) (200,000) (600,000)
---------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995....................... -- 254,534 254,534 254,534 763,602
Allocation of net income (unaudited)........... -- 119,611 119,611 119,611 358,833
Cash distribution (unaudited).................. -- (100,000) (100,000) (100,000) (300,000)
---------- ----------- ----------- ----------- -----------
BALANCE, June 30, 1996 (unaudited)............... $ -- $ 274,145 $ 274,145 $ 274,145 $ 822,435
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-76
<PAGE>
CORVALLIS MRI
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------------- ------------------------
1993 1994 1995 1995 1996
------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 258,481 $ 473,628 $ 739,833 $ 360,998 $ 358,833
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation.......................................... 189,537 265,278 267,752 133,876 137,393
Changes in operating assets and liabilities:..........
Decrease (increase) in accounts receivable.......... 127,329 (205,775) (113,319) (84,800) 111,894
Decrease (increase) in prepaid expenses............. 8,208 -- (12,103) -- 11,814
Decrease (increase) in related party receivable..... -- -- (22,244) (3,321) 22,244
(Decrease) increase in accounts payable............. -- 11,278 (942) 9,391 5,289
------------- ----------- ----------- ----------- -----------
Net cash provided by operating activities............. 583,555 544,409 858,977 416,144 647,467
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment.................................. (1,739,276) (80,535) (1,467) -- (21,104)
------------- ----------- ----------- ----------- -----------
Net cash used by investing activities................. (1,739,276) (80,535) (1,467) -- (21,104)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of long-term debt.................. (98,009) (278,865) (313,885) (154,314) (165,024)
New borrowings of long-term debt........................ 1,600,000 -- -- -- --
Purchase of partnership interest........................ (20,000) -- -- -- --
Distributions to partners............................... -- (338,815) (600,000) (225,000) (300,000)
------------- ----------- ----------- ----------- -----------
Net cash provided (used) by financing activities.... 1,481,991 (617,680) (913,885) (379,314) (465,024)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...... 326,270 (153,806) (56,375) 36,830 161,339
CASH AND CASH EQUIVALENTS, beginning of period............ 24,146 350,416 196,610 196,610 140,235
------------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................. $ 350,416 $ 196,610 $ 140,235 $ 233,440 $ 301,574
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................. $ 2,088 $ 90,111 $ 89,389 $ 47,008 $ 36,167
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Purchase of partnership interest in exchange for note
payable............................................... $ 130,000 $ -- $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these statements.
F-77
<PAGE>
CORVALLIS MRI
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Corvallis MRI (the Partnership) is an Oregon joint venture engaged in
providing Magnetic Resonance Imaging (MRI) services to patients in Corvallis,
Oregon and surrounding communities. The Partnership is owned equally by
Corvallis Radiology P.C. (CRPC), an Oregon professional corporation, The
Corvallis Clinic (TCC), an Oregon professional corporation and Samaritan
Enterprises (Enterprises), an Oregon corporation whose sole shareholder is
Samaritan, Inc.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with a
maturity of three months or less from the date of purchase.
EQUIPMENT
Equipment is recorded at cost including setup and installation. Maintenance
and repairs are expensed as incurred. Additions, which result in betterment of
operating performance or increased useful life of assets, are capitalized and
depreciated over the expected useful life. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts and any gain or loss on disposition is recorded as
other income or expense. Depreciation is computed on the straight-line method
over the estimated useful lives of the respective assets generally, five to
seven years.
INCOME TAXES
Corvallis MRI is a partnership; therefore, the partners are individually
responsible for their respective share of taxes based upon the partners
respective taxable income. Accordingly, no income taxes have been provided in
the accompanying financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership's financial instruments consist of cash and cash
equivalents, accounts receivable and debt instruments. At December 31, 1995 and
1994, the fair value of the Partnership's financial instruments approximated the
carrying value.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the interim periods ended June 30, 1995 and
1996 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been
F-78
<PAGE>
CORVALLIS MRI
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
condensed or omitted from the unaudited interim financial information. In the
opinion of the Partnership's management, the unaudited interim financial
information includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation. Results of operations for the
interim periods are not necessarily indicative of the results of operations for
the respective full years.
2. NET PATIENT SERVICE REVENUE:
Net patient service revenue include amounts due from third-party payors
under agreements that provide for payments to the Partnership at rates different
from standard fees. These third-party payors include certain commercial
insurance companies, health maintenance organizations (HMOs) and preferred
provider organizations, as well as certain government programs such as Medicare
and Medicaid. Payments to the Partnership under these agreements are based on
prospectively determined rates and discounts from established charges.
A summary of the payment arrangements with major third-party payors follows:
FEE-FOR-SERVICE
Patient service revenues are recorded in the period in which services are
provided at established rates. The Partnership has agreements with third-party
payors that provide payments to the Partnership at amounts different from its
established rates. The difference between changes generated from agreements with
third-party payors and the related payment amounts are reflected as contractual
discounts.
MEDICARE AND MEDICAID
A significant portion of the Partnership's services is provided to Medicare
and Medicaid patients. Payments for these services are based on a prevailing fee
schedule.
OTHER PAYORS
The Partnership has also entered into payment agreements with certain
commercial insurance carriers and preferred provider organizations. The basis
for payment to the Partnership under these agreements includes discounts from
established charges.
The following are the components of net patient service revenue:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross charges.................... $ 1,191,787 $ 1,460,336 $ 1,953,303 $ 977,312 $ 1,024,987
Less--Contractual discounts...... (254,051) (156,536) (295,684) (170,912) (176,499)
------------ ------------ ------------ ------------ ------------
Net patient service revenue...... $ 937,736 $ 1,303,800 $ 1,657,619 $ 806,400 $ 848,488
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
F-79
<PAGE>
CORVALLIS MRI
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
3. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable, 6.78%; payable in monthly installments
of $31,339, including interest, due at January 1,
1999............................................... $ 1,338,098 $ 1,043,717 $ 888,892
Note payable to former partner, 6.5%; payable in
monthly installments of $2,185, including interest,
due at November 1, 1999............................ 108,569 89,065 78,866
------------- ------------- -------------
1,446,667 1,132,782 967,758
Less--Current portion............................... (313,885) (336,047) (347,570)
------------- ------------- -------------
$ 1,132,782 $ 796,735 $ 620,188
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The notes have minimum payment schedules that call for the following
principal payments:
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------
<S> <C>
1996........................ $ 336,047
1997........................ 359,490
1998........................ 384,568
1999........................ 52,677
------------
$ 1,132,782
------------
------------
</TABLE>
4. RELATED PARTY TRANSACTIONS:
OPERATING LEASE
The Partnership leases facilities from Good Samaritan Hospital Corvallis
(the Hospital), a division of Samaritan, Inc., on a month-to-month basis. Rent
expense for the years ended December 31, 1993, 1994 and 1995 was $36,207,
$28,237 and $31,344, respectively, and $16,266 and $15,360 for the six months
ended June 30, 1995 and 1996, respectively.
MANAGEMENT FEES
Beginning in 1994, the Partnership paid a management fee to the Hospital for
the day-to-day management of Corvallis MRI. Prior to 1995, CRPC provided
management services. Management fees for the years ended December 31, 1993, 1994
and 1995 and the six months ended June 30, 1995 and 1996 were $23,125, $22,663,
$26,170, $20,110 and $18,451.
SALARIES, WAGES AND BENEFITS
The Hospital employs personnel for the operations of the Corvallis MRI. All
salary, wages and benefits are paid by the Hospital and reimbursed by the
Partnership. Salaries, wages and benefits for the years ended December 31, 1993,
1994 and 1995 were $159,103, $157,345 and $173,691, respectively, and $72,458
and $97,929 for the six months ended June 30, 1995 and 1996, respectively.
F-80
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Medford Clinic, P.C.:
We have audited the accompanying balance sheets of Medford Clinic, P.C. (an
Oregon professional service corporation) as of December 31, 1994 and 1995, and
the related statements of operations, cash flows and stockholders' equity for
each of the years in the three year period ended December 31, 1995. These
financial statements are the responsibility of Medford's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medford Clinic, P.C. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
September 6, 1996
F-81
<PAGE>
MEDFORD CLINIC, P.C.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 415,332 $ 598,313 $ 1,085,535
Short-term investments.............................................. -- 1,000,000 1,000,000
Patient accounts receivable, net of allowances for contractual
discounts and uncollectible acounts of $3,709,893, $3,430,087 and
$3,124,366 at December 31, 1994 and 1995, and June 30, 1996,
respectively...................................................... 7,107,738 6,681,655 6,901,116
Healthcare receivables.............................................. 753,635 528,351 460,267
Inventories of drugs and supplies................................... 228,486 290,061 258,424
Prepaid expenses and deposits....................................... 267,554 502,463 283,200
------------- ------------- -------------
Total current assets.......................................... 8,772,745 9,600,843 9,988,542
------------- ------------- -------------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
$3,400,228, $4,432,795 and $4,835,084 at December 31, 1994 and 1995,
and June 30, 1996, respectively..................................... 5,601,768 5,342,641 5,664,835
------------- ------------- -------------
LONG-TERM DEFERRED TAX ASSET.......................................... 120,807 22,213 22,359
------------- ------------- -------------
OTHER ASSETS:
Restricted investments.............................................. -- 206,802 243,574
Other............................................................... 38,433 72,476 35,375
------------- ------------- -------------
Total other assets............................................ 38,433 279,278 278,949
------------- ------------- -------------
Total assets.................................................. $ 14,533,753 $ 15,244,975 $ 15,954,685
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................... $ 680,934 $ 932,123 $ 968,127
Line of credit...................................................... 350,000 -- --
Accounts payable.................................................... 475,286 444,050 789,719
Income taxes payable................................................ -- -- 423,446
Accrued healthcare costs............................................ 105,852 486,183 529,539
Accrued compensation................................................ 1,961,743 2,090,690 2,402,262
Current deferred tax liability...................................... 2,157,624 2,406,068 2,238,619
Other liabilities................................................... 203,181 188,945 250,000
------------- ------------- -------------
Total current liabilities..................................... 5,934,620 6,548,059 7,601,712
------------- ------------- -------------
LONG-TERM DEBT, net of current portion................................ 5,459,011 4,931,980 4,437,117
------------- ------------- -------------
DEFERRED COMPENSATION AND OTHER LONG-TERM LIABILITIES................. 626,268 599,347 596,485
------------- ------------- -------------
STOCKHOLDERS' EQUITY:
Common stock--
$10 stated value; 500 shares authorized; 57, 56 and 56 shares
outstanding at December 31, 1994 and 1995 and June 30, 1996,
respectively.................................................... 570 560 560
Additional paid-in capital.......................................... 618 618 618
Retained earnings................................................... 2,512,666 3,164,411 3,318,193
------------- ------------- -------------
Total stockholders' equity.................................... 2,513,854 3,165,589 3,319,371
------------- ------------- -------------
Total liabilities and stockholders' equity.................... $ 14,533,753 $ 15,244,975 $ 15,954,685
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-82
<PAGE>
MEDFORD CLINIC, P.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Fee-for-service, net........................... $ 22,805,323 $ 29,920,212 $ 33,950,789 $ 16,525,223 $ 17,161,353
Prepaid healthcare............................. 268,854 2,407,238 5,014,747 2,332,129 3,344,716
------------- ------------- ------------- ------------- -------------
Net revenues................................. 23,074,177 32,327,450 38,965,536 18,857,352 20,506,069
Less--Provider compensation and benefits....... 7,008,886 9,248,234 11,239,198 5,280,554 5,709,027
------------- ------------- ------------- ------------- -------------
Net revenue less compensation to providers... 16,065,291 23,079,216 27,726,338 13,576,798 14,797,042
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES:
Clinic salaries, wages and benefits............ 7,683,369 10,900,534 11,837,774 5,370,715 6,250,949
Purchased medical services..................... 757,687 919,621 2,282,558 803,471 1,767,447
Medical and office supplies.................... 3,368,179 4,676,022 5,577,638 2,832,038 2,674,025
General and administrative expenses............ 2,306,128 2,959,495 3,446,487 1,590,741 1,904,900
Provision for uncollectible accounts........... 395,950 1,026,983 868,441 511,370 557,844
Depreciation and
amortization................................. 592,479 917,626 1,124,753 526,074 409,384
Rent and lease expense......................... 701,675 1,056,982 1,139,027 564,919 522,181
------------- ------------- ------------- ------------- -------------
Total operating expenses..................... 15,805,467 22,457,263 26,276,678 12,199,328 14,086,730
------------- ------------- ------------- ------------- -------------
Operating income............................. 259,824 621,953 1,449,660 1,377,470 710,312
OTHER INCOME (EXPENSE):
Interest income................................ 19,032 27,549 96,899 16,943 69,174
Interest expense............................... (200,119) (324,378) (486,776) (255,604) (202,362)
Equity in income of affiliate.................. 49,614 -- -- -- --
------------- ------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES....................... 128,351 325,124 1,059,783 1,138,809 577,124
INCOME TAX EXPENSE............................... 44,179 132,949 408,038 425,088 230,850
------------- ------------- ------------- ------------- -------------
NET INCOME....................................... $ 84,172 $ 192,175 $ 651,745 $ 713,721 $ 346,274
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-83
<PAGE>
MEDFORD CLINIC, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER PAID-IN RETAINED
OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992........................... 34 $ 340 $ 670 $ 2,236,319 $ 2,237,329
Issuance of common stock........................... 13 130 -- -- 130
Net income......................................... -- -- -- 84,172 84,172
--
----- ----- ------------ ------------
BALANCE, December 31, 1993........................... 47 470 670 2,320,491 2,321,631
Issuance of common stock........................... 12 120 -- -- 120
Redemption of common stock......................... (2) (20) (52) -- (72)
Net income......................................... -- -- -- 192,175 192,175
--
----- ----- ------------ ------------
BALANCE, December 31,1994............................ 57 570 618 2,512,666 2,513,854
Issuance of common stock........................... 5 50 -- -- 50
Redemption of common stock......................... (6) (60) -- -- (60)
Net income......................................... -- -- -- 651,745 651,745
--
----- ----- ------------ ------------
BALANCE, December 31, 1995........................... 56 560 618 3,164,411 3,165,589
Net income (unaudited)............................. -- -- -- 346,274 346,274
Costs incurred related to Physician Partners, Inc.
transaction (unaudited).......................... -- -- -- (192,492) (192,492)
--
----- ----- ------------ ------------
BALANCE, June 30, 1996 (unaudited)................... 56 $ 560 $ 618 $ 3,318,193 $ 3,319,371
--
--
----- ----- ------------ ------------
----- ----- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-84
<PAGE>
MEDFORD CLINIC, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 84,172 $ 192,175 $ 651,745 $ 713,721 $ 346,274
Adjustment to reconcile net income to
net cash provided by (used in)
operating activities--
Depreciation and amortization....... 592,479 917,626 1,124,753 526,074 409,384
Equity in income of affiliates...... (49,614) -- -- -- --
Deferred taxes...................... 89,937 153,943 347,038 400,485 (167,595)
Changes in operating assets and
liabilities:
Patient accounts receivable,
net............................. (1,866,122) (855,225) 426,083 (633,760) (219,461)
Healthcare receivables............ -- (753,635) 225,284 (67,294) 68,084
Inventories of drugs and
supplies........................ (46,428) (88,393) (61,575) (28,408) 31,637
Prepaid expenses and deposits..... 356,402 (54,838) (234,909) 168,137 219,263
Other assets...................... (707,226) 92,384 (34,043) 8,133 37,101
Accounts payable.................. 549,327 (119,659) (31,236) 544,540 345,669
Income taxes payable.............. -- -- -- -- 423,446
Accrued healthcare costs.......... -- 105,852 380,331 267,550 43,356
Accrued compensation and related
expenses........................ 688,832 (14,540) 128,947 (74,374) 311,572
Other liabilities................. (254,788) 116,057 (14,236) (203,181) 61,055
Deferred compensation and other
long-term liabilities........... 64,123 61,742 (26,921) (13,461) (2,862)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities.......... (498,906) (246,511) 2,881,261 1,608,162 1,906,923
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment........................... (197,428) (3,288,103) (865,626) (501,111) (731,578)
Purchases of short-term investments... -- -- (1,206,802) -- (36,772)
Proceeds from receipt of Rogue Valley
Dialysis dividends.................. 50,000 -- -- -- --
Cash received in purchase of Rogue
Valley Dialysis..................... 378,699 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
investing activities.......... 231,271 (3,288,103) (2,072,428) (501,111) (768,350)
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of
credit agreement.................... -- 350,000 -- -- --
Repayments under line of credit
agreement........................... -- -- (350,000) (350,000) --
Proceeds from issuance of long-term
debt................................ 2,706,997 2,999,055 467,224 404,653 --
Principal repayments of long-term
debt................................ (2,000,335) (259,834) (743,066) (328,849) (458,859)
Proceeds from issuance of common
stock............................... 130 120 50 -- --
Payments for redemption of common
stock............................... -- (72) (60) -- --
Costs incurred related to Physician
Partners, Inc. transaction.......... -- -- -- -- (192,492)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities.......... 706,792 3,089,269 (625,852) (274,196) (651,351)
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH............. 439,157 (445,345) 182,981 832,855 487,222
CASH AND CASH EQUIVALENTS, beginning of
year.................................. 421,520 860,677 415,332 415,332 598,313
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of
year.................................. $ 860,677 $ 415,332 $ 598,313 $ 1,248,187 $ 1,085,535
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest................ $ 184,964 $ 311,965 $ 492,280 $ 258,357 $ 221,117
Cash paid (received) for income
taxes............................... (10,704) (20,994) 36,000 -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-85
<PAGE>
MEDFORD CLINIC, P.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During
1993, Medford purchased the remaining 50 percent ownership of Rogue Valley
Dialysis. In conjunction with the acquisition, assets acquired and liabilities
were assumed as follows:
<TABLE>
<S> <C>
Accounts receivable................................................... $ 308,036
Intangibles........................................................... 25,000
Property, plant and equipment......................................... 1,237,158
Long-term debt........................................................ (1,300,000)
Partnership interest.................................................. (648,893)
-------------
Cash received......................................................... $ 378,699
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-86
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. BUSINESS AND ORGANIZATION:
Medford Clinic, P.C. (Medford), an Oregon professional service corporation,
is a primary-care based, multi-specialty medical clinic. Medford was founded in
1946 with the belief that group practice offers the best means of promoting and
maintaining the highest standards of medical care.
As of June 30, 1996, Medford consists of approximately 489 employees and 69
professional providers who offer a wide range of primary and specialty care. In
addition, Medford offers ancillary services such as radiology, pharmacy and
laboratory.
Medford also provides clinical dialysis services through its Rogue Valley
Dialysis Center division which was operated as a joint venture with Rogue Valley
Medical Center (RVMC) until 1993 when Medford purchased RVMC's interest in a
transaction accounted for as a purchase. Medford's sites are located in Southern
Oregon. A significant change in the demographics of this area may have an
adverse impact on the business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
Cash equivalents consist of all highly liquid investments with original
maturities of three months or less.
INVESTMENTS
Short-term and restricted investments are readily convertible to cash and
have original maturity dates that exceed three months. They are classified as
held-to-maturity and mature within one year of the financial statement date.
These investments are in commercial paper and the carrying value approximates
the fair value.
CONCENTRATION OF CREDIT RISK
Medford extends credit to patients covered by insurance programs such as
governmental programs (Medicare and Medicaid) and private insurers. Medford
manages credit risk with the various public and private insurance providers, as
deemed appropriate by management. Allowances for doubtful accounts have been
made for potential losses, where appropriate.
INVENTORIES OF DRUGS AND SUPPLIES
Inventories are stated at the lower of cost or market, determined by the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Maintenance, repairs and
minor replacements are expensed as incurred. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts and any gain or loss on disposition is recorded as
other income or expense. There were no disposals in 1993, 1994 and 1995.
F-87
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Estimated lives are as follows:
<TABLE>
<S> <C>
Building and building improvements............................... 7-30 years
Furniture and equipment.......................................... 5-12 years
</TABLE>
PROVIDER COMPENSATION AND BENEFITS
Provider compensation and benefits consists of the direct costs of patient
care providers such as physicians and other allied health professionals. A
substantial portion of these costs are paid to providers who are stockholders.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, restricted investments,
short-term investments, patient receivables, amounts payable and accrued
liabilities are a reasonable estimate of their fair value based on the short
maturities of these instruments.
Interest rates that are currently available to Medford for issuance of debt
with similar terms and remaining maturities were used to estimate fair value for
debt issues. The current carrying value of debt approximates fair value.
Medford does not hold or issue financial instruments or derivative financial
instruments for trading purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used, as well as for long-lived assets and certain identifiable intangibles
to be disposed of. Medford adopted the new standard in 1996. The effect of the
adoption was not material to Medford's financial position or results of
operations.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the interim periods ended June 30, 1995 and
1996 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been
F-88
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
condensed or omitted from the unaudited interim financial information. In the
opinion of Medford's management, the unaudited interim financial information
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation. Results of operations for the interim periods
are not necessarily indicative of the results of operations for the respective
full years.
3. REVENUES:
Medford reports its revenues according to two principal types of payment
methodologies discussed below:
PREPAID HEALTHCARE
Medford contracts with various Health Maintenance Organizations (HMOs) to
provide care to plan enrollees. These programs provide for a prepaid monthly
fixed capitation payment on a per member basis to Medford by the HMO for plan
enrollees.
The majority of the HMO contracts are full-risk or modified full-risk
contracts. Under a full-risk contract, Medford assumes the obligation of
providing all healthcare services to enrollees and is obligated to reimburse
outside providers for services rendered to enrollees. Generally, such payments
to outside providers are limited to out-of-area services, emergency services and
services not currently offered by Medford. Modified full-risk contracts are
similar to full-risk contracts except that the HMO is obligated to pay for
out-of-area services.
Medford has entered into subcapitation agreements with certain of these
outside providers. Under these agreements, Medford prepays the outside provider
based upon enrollee/participant formulas in which the subprovider assumes the
risk of providing patient care. Additional limitations on losses are provided by
the payment of stop loss reinsurance premiums and through a percentage
limitation on overall savings or losses of the programs.
Medford has accrued the claims associated with services provided by outside
providers for which Medford is responsible, and an estimate of incurred but not
reported claims is included in accrued healthcare cost in the accompanying
financial statements.
FEE-FOR-SERVICE
Patient service revenues are recorded in the period in which services are
provided at established rates. Medford has agreements with third-party payors
that provide payments to Medford at amounts different from its established
rates. The difference between charges generated from agreements with third-party
payors and the related payment amounts are reflected as contractual discounts,
as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fee-for-service, gross........ $ 27,067,613 $ 40,975,385 $ 43,299,335 $ 21,684,134 $ 23,166,377
Contractual discounts......... 4,262,290 11,055,173 9,348,546 5,158,911 6,005,024
------------- ------------- ------------- ------------- -------------
Fee-for-service, net.......... $ 22,805,323 $ 29,920,212 $ 33,950,789 $ 16,525,223 $ 17,161,353
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-89
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
3. REVENUES: (CONTINUED)
A summary of the most significant fee-for-service arrangements is as
follows:
MEDICARE
A significant portion of Medford's services are provided to Medicare
patients. Payments for Medicare outpatient services which are not
covered under capitated contracts are based on a prevailing fee
schedule. Approximately 37, 22, 27 and 21 (unaudited) percent of net
patient service revenues were derived from services provided to
fee-for-service Medicare patients in 1993, 1994 and 1995, and the six
months ended June 30, 1996, respectively.
MEDICAID
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule.
Approximately 4, 2, 2 and 1 (unaudited) percent of net patient service
revenues were derived from services provided to fee-for-service Medicaid
patients in 1993, 1994 and 1995, and the six months ended June 30, 1996,
respectively.
OTHER PAYORS
Medford has also entered into payment agreements with certain commercial
insurance carriers and preferred provider organizations. The basis for
payment to Medford under these agreements includes discounts from
established charges.
MAJOR CUSTOMER
One customer represented individually more than ten percent of Medford's net
revenue as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
------------------------------- ENDED
1993 1994 1995 JUNE 30, 1996
--------- --------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Blue Cross/Blue Shield of Oregon............. 16% 14% 16% 15%
</TABLE>
F-90
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995 JUNE 30, 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land and land improvements............................. $ 204,134 $ 204,134 $ 204,134
Buildings and leasehold improvements................... 1,881,703 1,910,507 2,012,957
Furniture and equipment................................ 6,913,547 7,647,654 7,909,965
Construction in progress............................... 2,612 13,141 372,863
------------- ------------- -------------
9,001,996 9,775,436 10,499,919
Less--Accumulated depreciation......................... (3,400,228) (4,432,795) (4,835,084)
------------- ------------- -------------
$ 5,601,768 $ 5,342,641 $ 5,664,835
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
5. INCOME TAX EXPENSE:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109). SFAS 109 requires that Medford follow
the liability method of accounting for deferred income taxes. Differences
between financial reporting and tax basis is primarily due to the use of the
cash method of accounting for income tax purposes. At December 31, 1995, Medford
has approximately $400,000 and $800,000 of net operating loss carryforwards for
federal and state income tax purposes, respectively, that expire in the year
2009.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
Medford's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995 JUNE 30, 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Cash to accrual adjustments.......................... $ 788,030 $ 918,656 $ 1,117,477
Net operating loss and credit carryforwards.......... 962,046 329,478 329,478
Other................................................ 10,502 10,507 10,500
------------- ------------- -------------
Gross deferred tax assets.......................... 1,760,578 1,258,641 1,457,455
Less--Valuation allowance.............................. (329,478) (329,478) (329,478)
------------- ------------- -------------
Net deferred tax amount............................ 1,431,100 929,163 1,127,977
Deferred tax liabilities:
Cash to accrual adjustments.......................... (3,334,218) (3,174,258) (3,204,237)
Property related book to tax differences............. (133,699) (138,760) (140,000)
------------- ------------- -------------
Gross deferred tax liabilities..................... (3,467,917) (3,313,018) (3,344,237)
------------- ------------- -------------
Net deferred tax liability......................... $ (2,036,817) $ (2,383,855) $ (2,216,260)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-91
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
5. INCOME TAX EXPENSE: (CONTINUED)
The net deferred tax liability is reflected in the accompanying balance
sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995 JUNE 30, 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred tax liability......................... $ (2,157,624) $ (2,406,068) $ (2,238,619)
Long-term deferred tax asset........................... 120,807 22,213 22,359
------------- ------------- -------------
$ (2,036,817) $ (2,383,855) $ (2,216,260)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal................................. $ -- $ -- $ -- $ -- $ 348,640
State................................... -- -- 61,000 -- 49,806
Deferred:
Federal................................. 38,657 116,330 303,658 371,952 (146,646)
State................................... 5,522 16,619 43,380 53,136 (20,950)
--------- --------- --------- --------- ---------
$ 44,179 $ 132,949 $ 408,038 $ 425,088 $ 230,850
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
taxes were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal tax at statutory rate.............. $ 44,923 $ 113,793 $ 370,924 $ 398,583 $ 201,993
Add (deduct):
State income tax, net of federal
benefit................................ 3,589 10,802 67,828 34,538 18,756
Other.................................... (4,333) 8,354 (30,714) (8,033) 10,101
--------- --------- --------- --------- ---------
$ 44,179 $ 132,949 $ 408,038 $ 425,088 $ 230,850
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-92
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
6. LONG-TERM DEBT:
Notes payable at December 31, 1994 and 1995, and June 30, 1996 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995 JUNE 30, 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Equipment loan with bank, interest at 7.25%, payable in
monthly installments of $22,169, maturing July 1, 2014,
secured by equipment, furniture and fixtures and
accounts receivable.................................... $ 944,572 $ 865,254 $ 762,477
Note payable with title company, interest at 7.90%,
payable in monthly installments of $6,227, maturing
July 1, 2013, secured by equipment, furniture and
fixtures............................................... 726,890 708,954 699,443
Equipment loan with bank, interest at 7.25%, payable in
monthly installments of $25,868, maturing June 1, 2002,
secured by equipment, furniture and fixtures, and
accounts receivable.................................... 1,295,347 1,585,450 1,488,900
Nonrevolving line of credit with bank, interest at 7.75%,
interest due monthly, maturing May 1, 1999, secured by
equipment and accounts receivable...................... 2,025,036 1,626,095 1,413,551
Facilities loan with bank, interest at 9.00%, payable in
monthly installments of $3,651, maturing September 1,
1998, secured by equipment, furniture and fixtures, and
accounts receivable.................................... 169,645 140,118 123,984
Mortgage with bank, interest at 8.25%, payable in monthly
installments of $4,987, maturing September 1, 2007,
secured by first deed on real property and equipment,
and furniture and fixtures............................. 494,315 474,520 463,995
Mortgage with bank, interest at 8.25%, recalculated on a
three year basis on a predetermined interest rate
formula, payable in monthly installments of principal
plus interest of $1,820, maturing December 15, 2014,
secured by first deed on real property and equipment,
furniture and fixtures................................. 228,750 225,639 224,029
Mortgage with bank, interest at 8.25%, recalculated on a
three year basis on a predetermined interest rate
formula, payable in monthly installments of principal
plus interest of $3,145, maturing December 15, 2001,
secured by second deed on real property and equipment,
furniture and fixtures................................. 255,390 238,073 228,865
------------- ------------- -------------
Total long-term debt................................. 6,139,945 5,864,103 5,405,244
Less--Current portion.................................... (680,934) (932,123) (968,127)
------------- ------------- -------------
Long-term debt, net of current portion............... $ 5,459,011 $ 4,931,980 $ 4,437,117
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-93
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
6. LONG-TERM DEBT: (CONTINUED)
Maturities of long-term debt for the next five years, including current
maturities, are as follows:
<TABLE>
<S> <C>
1996.......................... $ 932,123
1997.......................... 1,014,576
1998.......................... 1,094,935
1999.......................... 771,116
2000.......................... 357,609
Thereafter.................... 1,693,744
-------------
Total..................... $ 5,864,103
-------------
-------------
</TABLE>
In 1994, Medford arranged a borrowing agreement with a bank providing a line
of credit for short-term working capital needs of up to $1,000,000 secured by
accounts receivable. The line of credit bears interest at the lender's prime
rate plus .25 percent. At December 31, 1994, Medford had drawn $350,000 on this
line of credit. The line of credit was due May 1995 and paid in February 1995.
In May 1995, Medford renewed the above line of credit agreement with the
bank providing a line of credit for short-term working capital needs of up to
$500,000 secured by accounts receivable. At December 31, 1995 and June 30, 1996,
Medford had no outstanding balance related to this line of credit. The Agreement
expires September 30, 1996 and is not expected to be renewed by Medford.
7. RETIREMENT PLANS:
Medford has a 401(k) Profit-Sharing Plan (the 401(k) Plan) in which all
employees are eligible to participate subject to certain eligibility criteria.
The 401(k) Plan permits employees to contribute up to 15 percent of their annual
compensation (not to exceed certain annual limits imposed by the Internal
Revenue Code). Medford may also make discretionary contributions, which are
immediately 100 percent vested. Medford also has a Money-Purchase Pension Plan
in which all employees are eligible to participate subject to certain
eligibility criteria. Medford contributes 5.7 percent of the employee's eligible
earnings up to $62,481 and 11.4 percent of eligible earnings in excess of
limitations imposed by the Internal Revenue Service, $62,481 at December 31,
1995. These contributions are 100 percent vested upon eligibility.
Medford's contributions for these plans for the years ended December 31,
1993, 1994 and 1995, and the six months ended June 30, 1996 were approximately
$1,245,844, $830,635, $1,529,030 and $444,493 (unaudited), respectively.
8. PROFESSIONAL LIABILITY:
Medford maintains a claims-made professional liability insurance policy. The
policy coverage is $1,000,000 per claim per physician, with an aggregate maximum
benefit of $3,000,000 per year. Accruals for outstanding claims and the
associated deductibles are made in the period in which the event becomes known.
Medford also accrues an actuarial estimate of the future liability for claims
incurred but not made prior to the end of the accounting period.
F-94
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
9. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
Future minimum rental payments under operating leases that have initial or
remaining noncancellable lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1996.......................... $ 1,115,432
1997.......................... 1,037,686
1998.......................... 822,101
1999.......................... 693,037
2000.......................... 643,597
Thereafter.................... 3,217,985
-------------
Total..................... $ 7,529,838
-------------
-------------
</TABLE>
LEGAL PROCEEDINGS
Medford is subject to various legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, although the
ultimate dispositions of these proceedings are not determinable, adverse
determinations in any or all of such proceedings would not have a material
adverse effect upon the financial position or results of operations of Medford.
10. SUBSEQUENT EVENTS:
PHYSICIAN PARTNERS, INC.
The Board of Directors of Medford has approved a Reorganization and Merger
Agreement (the Agreement) dated July 29, 1996 together with the Boards of
HealthFirst Medical Group, P.C.; The Corvallis Clinic, P.C.; and Physician
Partners, Inc. (PPI), a newly formed company. This Agreement is subject to the
approval of the shareholders of the three medical groups.
This transaction would result in a separation of operations of the three
founding medical groups between medical professional services activities (i.e.,
providers of medical services) and the physician practice management activities
of the business. The professional services activities would be spun off into
newly formed professional corporations (New PCs). The physician practice
management business, along with substantially all of the assets and liabilities
of the three founding medical groups, i.e., accounts receivable, property,
plant, equipment, contracts, payables, accruals and debt, would be transferred
to PPI. When the transaction becomes effective, the shareholders of the existing
founding clinics will become the original shareholders of PPI.
An integral part of the reorganization is a 40-year management agreement
whereby PPI would provide physician practice management services to the New PCs.
Services to be provided would include management and administrative services,
capital resources, facilities, equipment and supplies.
As consideration, PPI would be entitled to (a) reimbursement of all
managerial costs and expenses (Manager's Expenses) incurred by PPI and (b) a
management fee equal to 16 percent of the Distributable Profit Amount (defined
as (i) gross revenues, booked on an accrual basis and subtracting contractual
discounts and bad debts, received by PPI or the New PCs relating to services
provided by the New PCs less (ii) Manager's Expense).
F-95
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
10. SUBSEQUENT EVENTS: (CONTINUED)
The New PCs would be responsible for providing medical services and the
related costs for provider compensation and benefits.
The Agreement contains a provision which would allow for any of the three
founding medical groups to make a distribution to its shareholders if its
shareholders' equity at June 30, 1996 exceeded a minimum threshold amount as
defined in the Agreement.
The parties to the reorganization transaction will receive an opinion from
tax counsel that for federal income tax purposes, it is more likely than not
that the reorganization will be a tax-free transaction. No ruling will be
requested from the Internal Revenue Service regarding the tax consequences of
the transaction. If the IRS or tax court were to determine that the transactions
were not tax free, there would be significant adverse tax consequence to the
parties to the transaction and their respective shareholders.
The Agreement contemplates that each of the three founding medical groups
will adopt a stock option plan for certain of its employees and grant new
options to purchase shares of its capital stock. Such options would then be
converted into an option to purchase PPI stock.
In anticipation of the consummation of the reorganization transaction,
various individuals have entered into Employment Agreements with PPI which
provide for base compensation, incentive bonuses, stock options and awards,
termination benefits and, in certain cases, severance compensation in the event
the transaction is not consummated prior to January 31, 1997. The obligations of
PPI under certain of these agreements are guaranteed by the three founding
medical groups.
In connection with the reorganization transaction, the three founding
medical groups have entered into an Expense Sharing Agreement which establishes
the basis upon which certain costs incurred in connection with the transactions
are to be allocated between the three groups.
In accordance with the terms of the reorganization Agreement, if one of the
parties terminates the Agreement, in certain circumstances, it may be liable to
other parties to pay all of their expenses incurred in connection with the
transaction.
F-96
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited, in accordance with generally accepted auditing standards,
the financial statements of HealthFirst Medical Group, P.C., The Suburban
Medical Clinic, Inc., The Corvallis Clinic, P.C., Corvallis MRI and Medford
Clinic, P.C. included in this registration statement and have issued our reports
thereon dated September 6, 1996. Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The schedules of
analysis of changes in the allowance for contractual discounts and uncollectible
accounts are the responsibility of each Company's management and are presented
for purposes of complying with the requirements of the Securities and Exchange
Commission s rules and are not a required part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statement and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon,
September 6, 1996
F-97
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CONTRACTUAL DISCOUNTS
AND UNCOLLECTIBLE ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------- ------------------- ----------- --------------------------- -------------
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ----------- ------------------- ----------- --------------------------- -------------
CONTRACTUAL BAD DEBT
DISCOUNTS WRITE-OFFS
------------ ------------
<S> <C> <C> <C> <C> <C>
1993 $ 580,000 $ 4,023,753 $ (3,061,044) $ (640,340) $ 902,369
1994 902,369 6,295,933 (5,180,981) (907,128) 1,110,193
1995 1,110,193 7,696,184 (6,165,298) (1,079,470) 1,561,609
</TABLE>
F-98
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CONTRACTUAL DISCOUNTS
AND UNCOLLECTIBLE ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------- ------------------- ----------- --------------------------- -------------
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ----------- ------------------- ----------- --------------------------- -------------
CONTRACTUAL BAD DEBT
DISCOUNTS WRITE-OFFS
------------ ------------
<S> <C> <C> <C> <C> <C>
1993 $ 174,591 $ 823,295 $ (607,011) $ (107,960) $ 282,915
1994 282,915 1,217,261 (885,097) (301,360) 313,719
1995 313,719 1,207,149 (1,030,529) (183,286) 307,053
</TABLE>
F-99
<PAGE>
THE CORVALLIS CLINIC, P.C.
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CONTRACTUAL DISCOUNTS
AND UNCOLLECTIBLE ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------- ------------------- ------------- --------------------------- -------------
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ----------- ------------------- ------------- --------------------------- -------------
CONTRACTUAL BAD DEBT
DISCOUNTS WRITE-OFFS
------------ ------------
<S> <C> <C> <C> <C> <C>
1993 $1,337,325 $ 6,045,520 $ (4,434,830) $ (914,784) $ 2,033,231
1994 2,033,231 6,765,684 (5,557,955) (1,178,960) 2,062,000
1995 2,062,000 6,841,932 (5,128,654) (1,783,278) 1,992,000
</TABLE>
F-100
<PAGE>
CORVALLIS MRI
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CONTRACTUAL DISCOUNTS
AND UNCOLLECTIBLE ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------- ------------------- ----------- --------------------------- -------------
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ----------- ------------------- ----------- --------------------------- -------------
CONTRACTUAL BAD DEBT
DISCOUNTS WRITE-OFFS
------------ ------------
<S> <C> <C> <C> <C> <C>
1993 $ 50,139 $ 245,051 $ (168,675) $ -- $ 126,515
1994 126,515 156,536 (188,709) -- 94,342
1995 94,342 295,684 (269,739) -- 120,287
</TABLE>
F-101
<PAGE>
MEDFORD CLINIC, P.C.
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CONTRACTUAL DISCOUNTS
AND UNCOLLECTIBLE ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------- ------------------- ------------ ------------------------- -------------
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ----------- ------------------- ------------ ------------------------- -------------
CONTRACTUAL BAD DEBT
DISCOUNTS WRITE-OFFS
------------ ----------
<S> <C> <C> <C> <C> <C>
1993 $1,359,451 $ 4,658,240 $ (4,110,378) $ (381,839) $1,525,474
1994 1,525,474 12,082,156 (9,056,430) (841,307) 3,709,893
1995 3,709,893 10,216,987 (9,604,566) (892,227) 3,430,087
</TABLE>
F-102
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
PPI is incorporated in the State of Delaware. Under Section 145 of the
General Corporation Law of the State of Delaware (the "DGCL"), a Delaware
corporation generally has the power to indemnify its present and former
directors and officers against expenses and liabilities incurred by them in
connection with any suit to which they are, or are threatened to be made, a
party by reason of their serving in those positions so long as (a) they acted in
good faith and in a manner they reasonably believed to be in, or not opposed to,
the best interests of the company, and (b) with respect to any criminal action,
they had no reasonable cause to believe their conduct was unlawful. Section 145
expressly provides that the power to indemnify authorized therein is not
exclusive of any rights granted under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The PPI Certificate and the By-laws of
PPI provide that PPI (i) will indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that such person is or was a director or
officer of PPI and (ii) may indemnify any person who was or is threatened to be
made a party to any proceeding by reason of the fact that such person is or was
an employee or agent of PPI, or is or was serving at the request of PPI as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, in each case specified in clauses (i) and
(ii), against expenses (including, without limitation, attorneys' fees)
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with such proceeding to the extent and in the manner permitted by
the DGCL, and any other applicable law, as from time to time in effect. PPI may
therefore incur liability on behalf of its directors and officers in the event
of a lawsuit against such persons in their capacity as directors or officers.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for such breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on, capital stock) of
the DGCL, or (iv) for any transactions from which the director derived an
improper personal benefit. The PPI Certificate contains such a provision.
The preceding discussion of the PPI Certificate and Section 145 of the DGCL
is not intended to be exhaustive and is qualified in its entirety by reference
to the complete text of the PPI Certificate which is included in this
Registration Statement at Exhibit 3.1 and by Section 145 of the DGCL.
II-1
<PAGE>
ITEM 21
EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
(a) The Following exhibits as filed herewith unless otherwise indicated:
2.1 Amended and Restated Agreement and Plan of Reorganization and Merger,
dated as of September 19, 1996, as amended on November 4, 1996, among
Physician Partners, Inc., The Corvallis Clinic, P.C., HealthFirst
Medical Group, P.C. and Medford Clinic, P.C. (filed herewith as Appendix
A to the Joint Proxy Statement/Prospectus).
3.1 Amended and Restated Certificate of Incorporation of PPI.
3.2 By-Laws of PPI.
4.1 Form of Class A Common Stock Certificate of PPI.
4.2 Continuing Unlimited Commercial Guaranty, dated May 24, 1995, by The
Corvallis Clinic, P.C. in favor of United States National Bank of Oregon
on behalf of HealthCare Partners, L.L.C.
4.3 Letter, dated November 4, 1996, from PPI to the Securities and Exchange
Commission.
5.1 Form of Opinion of McDermott, Will & Emery.
8.1 Form of Opinion of McDermott, Will & Emery.
10.1 Amended and Restated Employment Agreement, dated as of September 19, 1996,
between PPI and David M. Goldberg.
10.2 Amended and Restated Employment Agreement, dated as of September 19, 1996,
between PPI and Tim E. Dupell.
10.3 Employment Agreement, dated as of September 19, 1996, between PPI and
Michael F. Bonazzola, M.D.
10.4 Employment Agreement, dated as of September 19, 1996, between PPI and
Jerald Erstgaard.
10.5 Amended and Restated Employment Agreement, dated as of September 19, 1996,
between PPI and David Kobriger.
10.6 Employment Agreement, dated as of September 19, 1996, between PPI and Jon
Ness.
10.7 Employment Agreement, dated June 22, 1995, between Medford Clinic, P.C.
and Jon Ness.
10.8 Land Sale Contract, dated May 1, 1996, between HealthFirst Medical Group,
P.C. and HealthFirst Properties, L.L.C.
10.9 Medical Office Lease, dated May 1, 1996, between HealthFirst Properties,
L.L.C. and HealthFirst Medical Group, P.C. (Broadway).
10.10 Medical Office Lease, dated May 1, 1996, between HealthFirst Properties,
L.L.C. and HealthFirst Medical Group, P.C. (Tualatin).
10.11 Medical Office Lease, dated May 1, 1996, between HealthFirst Properties,
L.L.C. and HealthFirst Medical Group, P.C. (Westside).
10.12 Building Lease Agreement, dated December 15, 1994, between Legacy Health
System and Suburban Medical Clinic, Inc.
10.13 Office Lease, dated September 30, 1996, between Albers Mill Building
Partnership and HealthFirst Medical Group, P.C.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.14 Commercial Lease, dated October 14, 1994, between Gateway Properties,
L.L.C. and Suburban Medical Clinic, Inc.
10.15 Lease Agreement, dated as of June 1, 1995, between HealthCare Partners,
L.L.C. and The Corvallis Clinic, P.C.
10.16 Lease, dated June 13, 1989, between Rogue Valley Health Services, Inc. and
Medford Clinic, P.C.
10.17 Lease Agreement, dated December 1, 1993, between Southern Oregon Family
Practice Building Partnership and Medford Clinic, P.C.
10.18 Agreement, dated January 21, 1996, between Merle West Medical Center and
Medford Clinic, P.C.
10.19 1996 Stock Option Plan for Non-Employee Directors of PPI, effective as of
January 1, 1997 (filed herewith as Appendix C to the Joint Proxy
Statement/Prospectus).
10.20 Physician Partners, Inc. Change in Control Plan, effective December 31,
1996 (filed herewith as Appendix E to the Joint Proxy
Statement/Prospectus).
10.21 Management Agreement, dated February 1, 1996, between HealthFirst
Management Services, Inc. and HealthFirst Medical Group, P.C.
10.22 Medical Group Services Agreement, dated July 8, 1996, as amended August 6,
1996 and September 16, 1996, between The Corvallis Clinic, P.C. and
PacifiCare of Oregon, Inc.
23.1 Written Consent of Arthur Andersen, L.L.P., dated November 1, 1996.
23.2 Written Consent of American Appraisal Associates, Inc., dated November 5,
1996.
23.3 Written Consent of McDermott, Will & Emery, dated November 5, 1996
(included in the opinion filed as Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
Financial Data Schedules:
27.1 Physician Partners, Inc.
27.2 HealthFirst Medical Group, P.C.
27.3 The Corvallis Clinic, P.C.
27.4 Medford Clinic, P.C.
</TABLE>
All other Schedules have been omitted because they are not applicable or not
required or the information is included elsewhere in financial statements or on
notes thereto.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
(a) PPI hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "1933 Act");
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) PPI hereby undertakes that, for purposes of determining any liability
under the 1933 Act, each filing of PPI's annual report pursuant to Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
after that time shall be deemed to be the initial bona fide offering thereof.
(c) (1) PPI hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this Registration Statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) PPI undertakes that every prospectus (i) that is filed pursuant to
paragraph (1) immediately preceding or (ii) that purports to meet the
requirements of Section 10(a)(3) of the 1933 Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the 1933 Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to directors, officers and controlling persons of PPI pursuant
to the foregoing provisions, or otherwise, PPI has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by PPI of expenses incurred or paid by a
director, officer or controlling person of PPI in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, PPI will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to
II-4
<PAGE>
the court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the 1933 Act and will be governed
by the final adjudication of such issue.
(e) PPI hereby undertakes to respond to requests for information that is
incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or
13 of this form, within one business day of receipt of such request, and to send
the incorporated documents by first-class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding to
the request.
(f) PPI hereby undertakes to supply by means of a post-effective amendment
all information concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in the Registration
Statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, PPI
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Los Angeles,
State of California, on November 5, 1996.
PHYSICIAN PARTNERS, INC.
By: /s/ DAVID M. GOLDBERG
----------------------------------
David M. Goldberg
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
POWER OF ATTORNEY
Each of the undersigned hereby constitutes and appoints David M. Goldberg
and Tim E. Dupell as attorneys and agents for undersigned, or any of them, with
full power of substitution, for and in the name, place and stead of the
undersigned, in any and all capacities, to sign and file any and all amendments,
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, and exhibits to the
Registration Statement and all applications, instruments and other documents to
be filed with the Securities and Exchange Commission pertaining to the
registration of the securities covered hereby, with full power and authority to
do and perform any and all acts and things whatsoever requisite or desirable,
and hereby ratifies and conforms all that such attorneys-in-fact, or either of
them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
By: /s/ TIM E. DUPELL
----------------------------------
Tim E. Dupell
Chief Financial Officer,
Director
By: /s/ MICHAEL F. BONAZZOLA, M.D.
----------------------------------
Michael F. Bonazzola, M.D.
Director
By: /s/ BRUCE E. VAN ZEE, M.D.
----------------------------------
Bruce E. Van Zee, M.D.
Chairman of the Board, Director
II-6
<PAGE>
By: /s/ DAVID H. CUTSFORTH, JR., M.D.
----------------------------------
David H. Cutsforth, Jr., M.D.
Director
By: /s/ RUSSELL A. DOW, M.D.
----------------------------------
Russell A. Dow, M.D.
Director
By: /s/ DOUGLAS M. MANCINO, ESQ.
----------------------------------
Douglas M. Mancino, Esq.
Director
II-7
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION AND MERGER, dated
as of September 19, 1996 (this "Agreement"), among PHYSICIAN PARTNERS, INC., a
newly-formed Delaware corporation ("PPI"), THE CORVALLIS CLINIC, P.C., an Oregon
professional corporation ("Corvallis"), HEALTHFIRST MEDICAL GROUP, P.C., an
Oregon professional corporation ("HealthFirst"), and MEDFORD CLINIC, P.C., an
Oregon professional corporation ("Medford" and, together with Corvallis and
HealthFirst, referred to herein, collectively, as the "Companies").
WHEREAS, each of Corvallis, Medford and HealthFirst is a professional
medical corporation which employs physicians and other professionals, all of
whom are duly licensed and authorized to practice, in the case of physicians,
medicine or, in the case of other professionals, the respective professions of
such other professionals in the State of Oregon and who are experienced in the
rendering of medical services treatment;
WHEREAS, the board of directors of Corvallis has concluded that it would be
in the best interests of Corvallis and its shareholders to effect a
reorganization of its corporate structure and a business combination resulting
in a consolidation of certain of its operations with those of HealthFirst and
Medford, upon the terms and subject to the conditions set forth herein;
WHEREAS, the board of directors of HealthFirst has concluded that it would
be in the best interests of HealthFirst and its shareholders to effect a
reorganization of its corporate structure and a business combination resulting
in a consolidation of certain of its operations with those of Corvallis and
Medford, upon the terms and subject to the conditions set forth herein;
WHEREAS, the board of directors of Medford has concluded that it would be in
the best interests of Medford and its shareholders to effect a reorganization of
its corporate structure and a business combination resulting in a consolidation
of certain of its operations with those of Corvallis and HealthFirst, upon the
terms and subject to the conditions set forth herein;
WHEREAS, the board of directors of PPI has concluded that it would be in the
best interests of PPI to effect a business combination with Corvallis,
HealthFirst and Medford pursuant to a merger of such entities with and into PPI
(referred to herein as the "Merger") on the terms and subject to the conditions
set forth herein;
WHEREAS, it is intended that the PC Reorganizations (as such term is defined
in Section 1.2(c) hereof) and the Merger constitute, for federal income tax
purposes, "tax-free" reorganizations under Section 355 and Section 368 of the
Internal Revenue Code of 1986, as amended (referred to herein as the "Code"),
and the regulations promulgated thereunder;
WHEREAS, PPI, Corvallis, HealthFirst and Medford have entered into the
Agreement and Plan of Reorganization and Merger, dated as of July 29, 1996 (the
"Old Reorganization and Merger Agreement"), to effect the PC Reorganizations and
the Merger;
WHEREAS, pursuant to the Old Reorganization and Merger Agreement, (i)
Corvallis has incorporated, as a wholly-owned subsidiary thereof, a professional
corporation ("Corvallis New PC") under the Oregon Professional Corporation Act,
(ii) HealthFirst has incorporated, as a wholly-owned subsidiary thereof, a
professional corporation ("HealthFirst New PC") under the Oregon Professional
Corporation Act and (iii) Medford has incorporated, as a wholly-owned subsidiary
thereof, a professional corporation ("Medford New PC"); and
WHEREAS, PPI and the Companies wish to amend and restate the Old
Reorganization and Merger Agreement upon the terms and subject to the conditions
set forth herein;
A-1
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
ARTICLE I
PROFESSIONAL CORPORATION TRANSACTIONS
SECTION 1.1 PC INCORPORATION AND DISTRIBUTIONS. (a)(i) Prior to the
Effective Time (as such term is defined in Section 2.2 hereof), Corvallis shall
amend and restate the Articles of Incoporation of Corvallis New PC under the
Oregon Professional Corporation Act by filing the Restated Articles of
Incorporation of Corvallis New PC, substantially in the form attached hereto as
Exhibit A-1 or with such changes therein as are reasonably acceptable to PPI and
the other Companies, with the Secretary of State of the State of Oregon, and
adopt Bylaws of Corvallis New PC, substantially in the form attached hereto as
Exhibit A-2 or with such changes therein as are reasonably acceptable to PPI and
the other Companies (referred to herein, collectively, as the "Corvallis New PC
Incorporation").
(ii) As promptly as practicable after the approval of the Corvallis
Reorganization (as such term is defined in Section 1.2(a) hereof) and the Merger
by the requisite number of shareholders of Corvallis and upon satisfaction of
other closing conditions set forth in Article VII hereof, except for the
consummation of the PC Reorganizations and the execution and delivery of the
Management Agreements by the parties thereto, Corvallis shall (A) transfer
certain of its assets (referred to herein, collectively, as the "Corvallis New
PC Assets") relating to the provider professional services business of
Corvallis, which assets are set forth on Schedule 1.1(a)(ii) attached hereto, to
Corvallis New PC, and cause Corvallis New PC to assume the liabilities of
Corvallis relating to the Corvallis New PC Assets, and (B) make a distribution
in accordance with Section 60.181 of the Oregon Business Corporation Act under
which the then-current shareholders of Corvallis shall receive all of the issued
and outstanding shares of Corvallis New PC, allocated on a pro rata basis in
accordance with the fair market value of each such shareholder's then current
equity interest in Corvallis (such transfer and distribution being referred to
herein, collectively, as the "Corvallis Distribution"); PROVIDED, HOWEVER, that,
at the option of Corvallis, such allocation may be made on a basis other than in
accordance with the fair market value of each such shareholder's then-current
equity in Corvallis so long as such distribution would not cause adverse tax or
other consequences for the other Companies or their respective shareholders with
respect to (y) the qualification of the HealthFirst Distribution or the Medford
Distribution as a "reorganization" within the meaning of Section 355 of the Code
or (z) the qualification of the Merger as a "reorganization" within the meaning
of Section 368 of the Code.
(b)(i) Prior to the Effective Time, HealthFirst shall amend and restate the
Articles of Incoporation of HealthFirst New PC under the Oregon Professional
Corporation Act by filing the Restated Articles of Incorporation of HealthFirst
New PC, substantially in the form attached hereto as Exhibit A-1 or with such
changes therein as are reasonably acceptable to PPI and the other Companies,
with the Secretary of State of the State of Oregon, and adopt Bylaws of
HealthFirst New PC, substantially in the form attached hereto as Exhibit A-2 or
with such changes therein as are reasonably acceptable to PPI and the other
Companies (referred to herein, collectively, as the "HealthFirst New PC
Incorporation").
(ii) As promptly as practicable after the approval of the HealthFirst
Reorganization (as such term is defined in Section 1.2(b) hereof) and the Merger
by the requisite number of shareholders of HealthFirst and upon satisfaction of
other closing conditions set forth in Article VII hereof, except for the
consummation of the PC Reorganizations and the execution and delivery of the
Management Agreements by the parties thereto, HealthFirst shall (A) transfer
certain of its assets (referred to herein, collectively, as the "HealthFirst New
PC Assets") relating to the provider professional services business of
HealthFirst, which assets are set forth on Schedule 1.1(b)(ii) attached hereto,
to HealthFirst New PC, and cause HealthFirst New PC to assume the liabilities of
HealthFirst relating to the HealthFirst New PC Assets, and (B) make a
distribution in accordance with Section 60.181 of the Oregon Business
Corporation Act under which the
A-2
<PAGE>
then-current shareholders of HealthFirst shall receive all of the issued and
outstanding shares of HealthFirst New PC, allocated on a pro rata basis in
accordance with the fair market value of each such shareholder's then-current
equity interest in HealthFirst (such transfer and distribution being referred to
herein, collectively, as the "HealthFirst Distribution").
(c)(i) Prior to the Effective Time, Medford shall amend and restate the
Articles of Incoporation of Medford New PC under the Oregon Professional
Corporation Act by filing the Restated Articles of Incorporation of Medford New
PC, substantially in the form attached hereto as Exhibit A-1 or with such
changes therein as are reasonably acceptable to PPI and the other Companies,
with the Secretary of State of the State of Oregon, and adopt Bylaws of Medford
New PC, substantially in the form attached hereto as Exhibit A-2 or with such
changes therein as are reasonably acceptable to PPI and the other Companies
(referred to herein, collectively, as the "Medford New PC Incorporation").
(ii) As promptly as practicable after the approval of the Medford
Reorganization (as such term is defined in Section 1.2(c) hereof) and the Merger
by the requisite number of shareholders of Medford and upon satisfaction of
other closing conditions set forth in Article VII hereof, except for the
consummation of the PC Reorganizations and the execution and delivery of the
Management Agreements by the parties thereto, Medford shall (A) transfer certain
of its assets (referred to herein, collectively, as the "Medford New PC Assets")
relating to the provider professional services business of Medford, which assets
are set forth on Schedule 1.1(c)(ii) attached hereto, to Medford New PC, and
cause Medford New PC to assume the liabilities of Medford relating to the
Medford New PC Assets, and (B) make a distribution in accordance with Section
60.181 of the Oregon Business Corporation Act under which the then-current
shareholders of Medford shall receive all of the issued and outstanding shares
of Medford New PC, allocated on a pro rata basis in accordance with the fair
market value of each such shareholder's then-current equity interest in Medford
(such transfer and distribution being referred to herein, collectively, as the
"Medford Distribution").
SECTION 1.2 PC CONVERSIONS. (a) As promptly as practicable after the
approval of the Corvallis Reorganization and the Merger by the requisite number
of shareholders of Corvallis, and upon satisfaction of other closing conditions
set forth in Article VII, hereof, the consummation of the Corvallis New PC
Incorporation and the Corvallis Distribution described in Section 1.1(a) hereof
and upon satisfaction of other closing conditions set forth in Article VII
hereof, except for the execution and delivery of the Management Agreements by
the parties thereto, Corvallis shall convert from an Oregon professional
corporation to an Oregon business corporation (such conversion being referred to
herein as the "Corvallis Conversion" and, together with the Corvallis New PC
Incorporation and the Corvallis Distribution, collectively, as the "Corvallis
Reorganization") by filing Restated Articles of Incorporation, substantially in
the form attached hereto as Exhibit B or with such changes therein as are
reasonably acceptable to PPI and the other Companies, together with the required
fee, with the Secretary of State of the State of Oregon in accordance with
Section 58.125(2) of the Oregon Professional Corporation Act and Section 60.451
of the Oregon Business Corporation Act (the Oregon Business Corporation Act and
the Oregon Professional Corporation Act are referred to herein, collectively, as
"Oregon Law").
(b) As promptly as practicable after the approval of the HealthFirst
Reorganization and the Merger by the requisite number of shareholders of
HealthFirst, the consummation of the HealthFirst New PC Incorporation and the
HealthFirst Distribution described in Section 1.1(b) hereof upon satisfaction of
other closing conditions set forth in Article VII hereof, except for the
execution and delivery of the Management Agreements by the parties thereto,
HealthFirst shall convert from an Oregon professional corporation to an Oregon
business corporation (such conversion being referred to herein as the
"HealthFirst Conversion" and, together with the HealthFirst New PC Incorporation
and the HealthFirst Distribution, collectively, as the "HealthFirst
Reorganization") by filing Restated Articles of Incorporation, substantially in
the form attached hereto as Exhibit B or with such changes therein as are
reasonably acceptable to PPI and the other Companies, together with the required
fee, with the Secretary of State of
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the State of Oregon in accordance with Section 58.125(2) of the Oregon
Professional Corporation Act and Section 60.451 of the Oregon Business
Corporation Act.
(c) As promptly as practicable after the approval of the Medford
Reorganization and the Merger by the requisite number of shareholders of
Medford, the consummation of the Medford New PC Incorporation and the Medford
Distribution described in Section 1.1(c) hereof and upon satisfaction of other
closing conditions set forth in Article VII hereof, except for the execution and
delivery of the Management Agreements by the parties thereto, Medford shall
convert from an Oregon professional corporation to an Oregon business
corporation (such conversion being referred to herein as the "Medford
Conversion" and, together with the Medford New PC Incorporation and the Medford
Distribution, collectively, as the "Medford Reorganization") by filing Restated
Articles of Incorporation, substantially in the form attached hereto as Exhibit
B or with such changes therein as are reasonably acceptable to PPI and the other
Companies, together with the required fee, with the Secretary of State of the
State of Oregon in accordance with Section 58.125(2) of the Oregon Professional
Corporation Act and Section 60.451 of the Oregon Business Corporation Act. The
Corvallis Reorganization, the HealthFirst Reorganization and the Medford
Reorganization are referred to herein, collectively, as the "PC
Reorganizations."
SECTION 1.3 MANAGEMENT AGREEMENTS. As promptly as practicable after the
approval of the respective PC Reorganizations and the Merger by the requisite
number of shareholders of Corvallis, HealthFirst and Medford, the consummation
of the PC Reorganizations described in Sections 1.1 and 1.2 hereof and upon
satisfaction of other closing conditions set forth in Article VII, (a) Corvallis
shall enter into a Practice Management Agreement, in substantially the form
attached hereto as Exhibit C or with such changes therein as are reasonably
acceptable to PPI and the other Companies (referred to herein as the "Corvallis
Management Agreement"), with Corvallis New PC, (b) HealthFirst shall enter into
a Practice Management Agreement, in substantially the form attached hereto as
Exhibit C or with such changes therein as are reasonably acceptable to PPI and
the other Companies (referred to herein as the "HealthFirst Management
Agreement"), with HealthFirst New PC and (c) Medford shall enter into a Practice
Management Agreement, in substantially the form attached hereto as Exhibit C
(referred to herein as the "Medford Management Agreement" and, together with the
Corvallis Management Agreement and the HealthFirst Management Agreement,
referred to herein, collectively, as the "Management Agreements"), with Medford
New PC.
ARTICLE II
MERGER
SECTION 2.1 MERGER. Subject to and upon the terms and conditions of this
Agreement, Oregon Law and the General Corporation Law of the State of Delaware
(referred to herein as "Delaware Law"), at the Effective Time, Corvallis,
HealthFirst and Medford shall be merged with and into PPI, the separate
corporate existence of each of Corvallis, HealthFirst and Medford shall cease
and PPI shall continue under Delaware Law as the surviving corporation
(hereinafter sometimes referred to as the "Surviving Corporation").
SECTION 2.2 EFFECTIVE TIME. As promptly as practicable after the approval
of the respective PC Reorganizations and the Merger by the requisite number of
shareholders of Corvallis, HealthFirst and Medford, the consummation of the PC
Reorganizations described in Sections 1.1 and 1.2 hereof, the execution of the
Management Agreements described in Section 1.3 hereof and upon satisfaction of
all other closing conditions set forth in Article VII hereof, the Surviving
Corporation shall file (a) a certificate of merger relating to the Merger
(referred to herein as the "Certificate of Merger") with the Secretary of State
of the State of Delaware and (b) articles of merger relating to the Merger
(referred to herein as the "Articles of Merger") with the Secretary of State of
the State of Oregon. For purposes of this Agreement, the term "Effective Time,"
with respect to the Merger, means the date and time at which the Certificate of
Merger is successfully filed.
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SECTION 2.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all of the property, rights, privileges and powers of each of
Corvallis, HealthFirst and Medford shall vest in the Surviving Corporation, and
all debts, liabilities and obligations of each of Corvallis, HealthFirst and
Medford shall become the debts, liabilities and obligations of the Surviving
Corporation.
SECTION 2.4 PPI CERTIFICATE OF INCORPORATION; BYLAWS. At the Effective
Time, the Amended and Restated Certificate of Incorporation and the Bylaws of
PPI, as in effect immediately prior to the Effective Time (copies of which are
attached hereto as Exhibits D-1 and D-2, respectively) shall be the Certificate
of Incorporation and the Bylaws of the Surviving Corporation until thereafter
amended as provided by Delaware Law and such Certificate of Incorporation and
Bylaws.
SECTION 2.5 PPI DIRECTORS AND OFFICERS. At the Effective Time, the
directors and officers of PPI immediately prior to the Effective Time shall be
the directors and officers of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation.
SECTION 2.6 PPI EMPLOYMENT AGREEMENTS AND OPTION PLANS. Simultaneously
with the execution of this Agreement, PPI is entering into the Amended and
Restated Employment Agreements with each of David Goldberg, Tim Dupell and David
Kobriger, substantially in the forms attached hereto as Exhibit E-1, E-2 and
E-5, respectively, and Employment Agreements with Michael Bonazzola, M.D., Jerry
Erstgaard and Jon Ness, substantially in the forms attached hereto as Exhibit
E-3, E-4 and E-6. Prior to the Effective Time, each of the Companies shall use
all reasonable efforts to recommend to its shareholders for the approval and
adoption of (a) the Employee Stock Option Plan, substantially in the form
attached hereto as Exhibit F-1 or with such changes therein as are reasonably
acceptable to PPI and each of the Companies (referred to herein as the "PPI
Employee Option Plan"), (b) the Non-Employee Director Stock Option Plan,
substantially in the form attached hereto as Exhibit F-2 or with such changes
therein as are reasonably acceptable to PPI and each of the Companies (referred
to herein as the "PPI Non-Employee Director Option Plan"), (c) the Non-Employee
Provider Stock Option Plan, substantially in the form attached hereto as Exhibit
F-3 or with such changes therein as are reasonably acceptable to PPI and each of
the Companies (referred to herein as the "PPI Non-Employee Provider Option
Plan") and (d) the Change in Control Plan, substantially in the form attached
hereto as Exhibit F-4 or with such changes therein as are reasonably acceptable
to PPI and each of the Companies (referred to herein as the "PPI Change in
Control Plan").
SECTION 2.7 CONVERSION OF OLD PC SHARES IN MERGER. (a) At the Effective
Time, by virtue of the Merger and without any action on the part of any of
Corvallis, HealthFirst or Medford or any of their respective shareholders,
shares of capital stock of Corvallis, HealthFirst and Medford (referred to
herein, collectively, as "Old PC Shares") issued and outstanding immediately
prior to the Effective Time shall be converted at the Effective Time into the
right to receive shares of Class A Common Stock, par value $0.01 per share ("PPI
Class A Shares"), of PPI, in accordance with the following exchange ratios
(referred to herein as the "Exchange Ratios"), as applicable:
(i)(A) Each share of Class C Preferred Stock of Corvallis shall be
converted into the right to receive such number of PPI Class A Shares as
shall have an aggregate value of $100, with the value of each PPI Class A
Share being equal to the quotient obtained by dividing (I) the aggregate
number of PPI Shares to be issued pursuant to the Merger into (II) the
combined value of Corvallis, HealthFirst and Medford as a merged entity
based on the assumption that the Merger had occurred on June 30, 1996, as
determined by an independent valuation firm designated by Corvallis;
(B) Each share of Class A Preferred Stock of Corvallis shall be
converted into the right to receive such number of PPI Class A Shares as
shall have an aggregate value of $23,000, with the value of each PPI Class A
Share being equal to the quotient obtained by dividing (I) the aggregate
number of PPI
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Shares to be issued pursuant to the Merger into (II) the combined value of
Corvallis, HealthFirst and Medford as a merged entity based on the
assumption that the Merger had occurred on June 30, 1996, as determined by
an independent valuation firm designated by Corvallis; and
(C) Each share of Class B Common Stock of Corvallis shall be converted
into the right to receive such number of PPI Class A Shares as is equal to
the quotient obtained by dividing (I) the number of all issued and
outstanding shares of Class B Preferred Stock of Corvallis at the Effective
Time into (II) the excess of 2,247,750 PPI Class A Shares (which is equal to
the product of the Corvallis FTE as of June 1, 1996 multiplied by 27,000)
over the aggregate number of PPI Class A Shares into which all of the issued
and outstanding shares of Class A Preferred Stock of Corvallis and Class C
Preferred Stock of Corvallis are converted under paragraphs (A) and (B) in
this Section 2.7(a)(i);
PROVIDED, HOWEVER, that in the event of a reduction in the number of
Corvallis FTE (as such term is defined in Section 3.3(a) hereof) as of
October 1, 1996 from the Corvallis FTE as of June 1, 1996 only, the total
number of PPI Class A Shares allocated to Corvallis set forth in Clause II
of this Section 2.7(a)(i)(C) shall be reduced by an amount equal to the
product of the number of such reduction in the Corvallis FTE multiplied by
27,000 PPI Class A Shares;
(ii) Each Class A Share of HealthFirst shall be converted into the right
to receive 354 PPI Class A Shares; PROVIDED, HOWEVER, that (A) in the event
of a reduction in the number of HealthFirst FTE (as such term is defined in
Section 3.3(b) hereof) as of October 1, 1996 from the HealthFirst FTE as of
June 1, 1996 only, the Exchange Ratio for each Class A Share of HealthFirst
shall be reduced by an amount equal to the excess of (a) 354 over (b) the
quotient obtained by dividing (i) the total number of the issued and
outstanding shares of capital stock of HealthFirst into (ii) the product of
27,000 multiplied by the HealthFirst FTE as of October 1, 1996 and (B) in
the event any Class A shares of HealthFirst (collectively, the "New HF
Shares") are issued, at any time prior to the Effective Time, to any of the
12 non-shareholder provider employees of HealthFirst designated by
HealthFirst, the Exchange Ratio for each of Class A Shares of HealthFirst
and New HF Shares shall be reduced by an amount equal the excess of (a) 354
over (b) the quotient obtained by dividing (i) the aggregate number of all
issued and outstanding Class A Shares of Healthfirst and the New HF Shares
into (ii) the product of the HealthFirst FTE effective as of such date
multiplied by 27,000; and
(iii) Each share of Common Stock of Medford shall be converted into the
right to receive 27,474 PPI Class A Shares; PROVIDED, HOWEVER, that (A) in
the event of a reduction in the Medford FTE (as such term is defined in
Section 3.3(c) hereof) as of October 1, 1996 from the Medford FTE as of June
1, 1996 only, the Exchange Ratio for each share of Common Stock of Medford
shall be reduced by an amount equal to the excess of (a) 27,474 over (b) the
quotient obtained by dividing (i) the total number of the issued and
outstanding shares of Common Stock of Medford into (ii) the product of
27,000 multiplied by the Medford FTE as of October 1, 1996 and (B) in the
event any shares of Common Stock of Medford (collectively, the "New Medford
Shares") are issued, at any time prior to the Effective Time, to any of the
two non-shareholder provider employees of Medford designated by Medford, the
Exchange Ratio for each share of Common Stock of Medford and the New Medford
Shares shall be reduced by an amount equal the excess of (a) 27,474 over (b)
the quotient obtained by dividing (i) the aggregate number of all issued and
outstanding shares of Common Stock of Medford and the New Medford Shares
into (ii) the product of the Medford FTE effective as of such date
multiplied by 27,000.
(b) At the Effective Time, all Old PC Shares shall no longer be outstanding
and shall automatically be canceled and retired and shall cease to exist, and
each certificate previously evidencing any such Old PC Shares shall thereafter
evidence PPI Class A Shares. Each certificate evidencing Old PC Shares shall be
exchanged for one or more certificates evidencing PPI Class A Shares issued in
consideration therefor upon the surrender of such certificate evidencing Old PC
Shares in accordance with the provisions hereof.
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(c) Each share of Corvallis, HealthFirst or Medford held in the treasury
thereof immediately prior to the Effective Time shall be canceled and retired
and cease to exist, and no PPI Class A Shares shall be issued in exchange
therefor.
(d) At the Effective Time, all PPI Class Shares owned by Corvallis,
HealthFirst or Medford shall become treasury stock of PPI.
SECTION 2.8 STOCK OPTIONS. (a) At the Effective Time, Corvallis'
obligations with respect to each outstanding Corvallis Stock Option (as such
term is defined in Section 3.3(a) hereof), as amended pursuant to the following
sentence, shall be assumed by PPI. The Corvallis Stock Options so assumed by PPI
shall continue to have, and be subject to, the same terms and conditions set
forth in the stock option plans and agreements pursuant to which such Corvallis
Stock Options were issued as in effect immediately prior to the Effective Time,
except that (i) each such Corvallis Stock Option shall be exercisable for such
number of PPI Class A Shares as is equal to the product of (A) the number of
Class B Common Stock of Corvallis covered by such Corvallis Stock Option
immediately prior to the Effective Time multiplied by (B) Class B Common Stock
of Corvallis and (ii) the per share exercise price for PPI Class A Shares
issuable upon the exercise of such Corvallis Stock Option shall be equal to the
quotient determined by (A) dividing the exercise price per share of Class B
Common Stock of Corvallis into (B) the Exchange Ratio applicable to Class B
Common Stock of Corvallis. The date of the grant shall be deemed to be the
Effective Time. PPI shall (y) reserve for issuance the number of PPI Class A
Shares that will become issuable upon the exercise of such Corvallis Stock
Options pursuant to this Section 2.8(a) and (z) at the Effective Time, issue to
each holder of an outstanding Corvallis Stock Option a document evidencing the
assumption by PPI of the obligations of Corvallis with respect thereto under
this Section 2.8(a). Nothing in this Section 2.8(a) shall affect the schedule of
vesting with respect to the Corvallis Stock Options to be assumed by PPI as set
forth herein.
(b) At the Effective Time, HealthFirst's obligations with respect to each
outstanding HealthFirst Stock Option (as such term is defined in Section 3.3(b)
hereof), as amended pursuant to the following sentence, shall be assumed by PPI.
The HealthFirst Stock Options so assumed by PPI shall continue to have, and be
subject to, the same terms and conditions set forth in the stock option plans
and agreements pursuant to which such HealthFirst Stock Options were issued as
in effect immediately prior to the Effective Time, except that (i) each such
HealthFirst Stock Option shall be exercisable for such number of PPI Class A
Shares as is equal to the product of (A) the number of Old PC Shares of
HealthFirst covered by such HealthFirst Stock Option immediately prior to the
Effective Time multiplied by (B) 354 and (ii) the per share exercise price for
PPI Class A Shares issuable upon the exercise of such HealthFirst Stock Option
shall be equal to the quotient determined by (A) dividing the exercise price per
share of Old PC Shares of HealthFirst into (B) 354. The date of the grant shall
be deemed to be the Effective Time. PPI shall (y) reserve for issuance the
number of PPI Class A Shares that will become issuable upon the exercise of such
HealthFirst Stock Options pursuant to this Section 2.8(b) and (z) at the
Effective Time, issue to each holder of an outstanding HealthFirst Stock Option
a document evidencing the assumption by PPI of the obligations of HealthFirst
with respect thereto under this Section 2.8(b). Nothing in this Section 2.8(b)
shall affect the schedule of vesting with respect to the HealthFirst Stock
Options to be assumed by PPI as set forth herein.
(c) At the Effective Time, Medford's obligations with respect to each
outstanding Medford Stock Option (as such term is defined in Section 3.3(c)
hereof), as amended pursuant to the following sentence, shall be assumed by PPI.
The Medford Stock Options so assumed by PPI shall continue to have, and be
subject to, the same terms and conditions set forth in the stock option plans
and agreements pursuant to which such Medford Stock Options were issued as in
effect immediately prior to the Effective Time, except that (i) each such
Medford Stock Option shall be exercisable for such number of PPI Class A Shares
as is equal to the product of (A) the number of Old PC Shares of Medford covered
by such Medford Stock Option immediately prior to the Effective Time multiplied
by (B) 27,474 and (ii) the per share exercise price for PPI Class A Shares
issuable upon the exercise of such Medford Stock Option shall be equal to the
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quotient determined by (A) dividing the exercise price per share of Old PC
Shares of Medford into (B) 27,474. The date of the grant shall be deemed to be
the Effective Time. PPI shall (y) reserve for issuance the number of PPI Class A
Shares that will become issuable upon the exercise of such Medford Stock Options
pursuant to this Section 2.8(c) and (z) at the Effective Time, issue to each
holder of an outstanding Medford Stock Option a document evidencing the
assumption by PPI of the obligations of Medford with respect thereto under this
Section 2.8(c). Nothing in this Section 2.8(c) shall affect the schedule of
vesting with respect to the Medford Stock Options to be assumed by PPI as set
forth herein.
SECTION 2.9 EXCHANGE OF OLD PC SHARES. (a) No later than the Effective
Time, PPI shall make available, and each holder of Old PC Shares will be
entitled to receive, upon surrender to PPI of one or more certificates
evidencing such Old PC Shares for cancellation, certificates evidencing the
number of PPI Class A Shares into which such Old PC Shares are converted in the
Merger. PPI Class A Shares into which Old PC Shares are to be converted in the
Merger shall be deemed to have been issued at the Effective Time.
(b) As soon as reasonably practicable after the Effective Time, PPI shall
mail to each holder of record of a certificate or certificates evidencing
outstanding Old PC Shares which Old PC Shares were converted into PPI Class A
Shares pursuant to Section 2.7 hereof (i) a letter of transmittal (which shall
specify that risk of loss and title to such certificate or certificates
evidencing Old PC Shares shall pass only upon receipt of such certificates by
PPI in such form as PPI may reasonably specify) and (ii) instructions for use in
effecting the surrender of such certificates in exchange for certificates
evidencing PPI Class A Shares. Upon surrender of a certificate evidencing Old PC
Shares for cancellation to PPI together with such letter of transmittal, duly
executed, the holder of such certificate shall be entitled to receive in
exchange therefor a certificate evidencing such number of whole PPI Class A
Shares as such holder has the right to receive in respect of such certificate
evidencing Old PC Shares surrendered pursuant to the provisions of this Section
2.9.
(c) In the event that any certificate evidencing Old PC Shares shall have
been lost, stolen or destroyed, upon the making of an affidavit with respect
thereto by the person or entity claiming such certificate to be lost, stolen or
destroyed, as the case may be, PPI will issue or cause to be issued in exchange
for such lost, stolen or destroyed certificate the number of PPI Class A Shares
into which such Old PC Shares evidenced by such certificate are converted in the
Merger in accordance with Section 2.7 hereof. When authorizing any such
issuance, the board of directors of PPI may, in its discretion and as a
condition precedent to such issuance, require the owner of any such lost, stolen
or destroyed certificate to provide the Surviving Corporation a bond in such sum
as the Surviving Corporation may direct as indemnity, or provide such other form
of indemnity as the Surviving Corporation shall direct, with respect to any
claim that may be made against the Surviving Corporation with respect to such
certificate evidencing Old PC Shares alleged to have been lost, stolen or
destroyed.
SECTION 2.10 DIVIDENDS; TRANSFER TAXES. No dividends that are declared on
PPI Class A Shares will be paid to any person or entity entitled to receive
certificates evidencing PPI Class A Shares until such person or entity
surrenders its certificate or certificates evidencing Old PC Shares. Upon such
surrender, there shall be paid to such person or entity in which name the
certificates evidencing such PPI Class A Shares shall be issued any such
dividends which shall have become payable, but shall not have been paid, with
respect to such PPI Class A Shares between the Effective Time and the time of
such surrender. In no event shall any person or entity entitled to receive any
such dividends be entitled to receive interest on such dividends. If any
certificate for any PPI Class A Shares is to be issued in a name other than that
in which the certificate evidencing Old PC Shares surrendered in exchange
therefor is registered, it shall be a condition of such issuance that the person
or entity requesting such issuance shall (a) pay to PPI any transfer or other
taxes required by reason of the issuance of such certificate for such PPI Class
A Shares in a name other than that of the registered holder of such certificate
evidencing Old PC Shares so surrendered or (b) establish to the satisfaction of
PPI that such tax has been paid or that no such tax is payable. Notwithstanding
the foregoing, neither PPI nor the Surviving Corporation shall be liable to a
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holder of Old PC Shares for any PPI Class A Shares or dividends thereon or any
cash payment for fractional interests payable under Section 2.11 hereof
delivered to a public official pursuant to applicable escheat laws.
SECTION 2.11 NO FRACTIONAL SECURITIES. No certificates or scrip evidencing
fractional PPI Class A Shares shall be issued upon the surrender for exchange of
certificates evidencing Old PC Shares under this Article II. In lieu of any such
fractional securities, each holder of Old PC Shares which would otherwise have
been entitled to a fraction of a PPI Common Share upon surrender of certificates
evidencing such Old PC Shares for exchange pursuant to this Article II shall be
paid an amount in cash (without interest), rounded to the nearest cent, equal to
the product of (a) such fraction multiplied by (b) the fair market value of a
PPI Common Share as of the Effective Time as determined by the board of
directors of PPI.
SECTION 2.12 CLOSING OF TRANSFER BOOKS. At the Effective Time, the stock
transfer books of Corvallis, HealthFirst and Medford shall be closed and no
transfer of Old PC Shares shall thereafter be made. If, after the Effective
Time, certificates evidencing Old PC Shares are presented to the Surviving
Corporation, such certificates shall be canceled and exchanged for certificates
evidencing PPI Class A Shares in accordance with the terms hereof. From and
after the Effective Time, the holders of Old PC Shares to be converted into PPI
Class A Shares pursuant to this Agreement shall cease to have any rights as
shareholders of Corvallis, HealthFirst or Medford, as the case may be, except
for the right to surrender stock certificates evidencing such Old PC Shares in
exchange for PPI Class A Shares and cash consideration for fractional interests
as described in this Article II.
SECTION 2.13 DISSENTING SHARES. If any shareholder of Corvallis,
HealthFirst or Medford (referred to herein as the "Dissenting Shareholder") is
entitled to dissent from the Merger and delivers a written demand for the fair
value of Old PC Shares held by such Dissenting Shareholder in accordance with
the provisions of Section 60.554 of the Oregon Business Corporation Act
concerning the right of such Dissenting Shareholder to dissent from the Merger
and demand payment of the fair value of such Old PC Shares, such Old PC Shares
shall not be converted to PPI Class A Shares as described in Section 2.7 hereof
but shall, from and after the Effective Time, represent only the right to
receive payment of the fair value of such Old PC Shares, plus accrued interest,
determined in accordance with Section 60.557 of the Oregon Business Corporation
Act; PROVIDED, HOWEVER, that Old PC Shares held by a Dissenting Shareholder
which shall, after the Effective Time, withdraw such Dissenting Shareholder's
demand for the fair value of such Old PC Shares or otherwise lose such
Dissenting Shareholder's right to receive the fair value thereof by failing to
demand payment of the fair value of such Old PC Shares or deposit such
Dissenting Shareholder's stock certificates with Corvallis, HealthFirst or
Medford, as the case may be, by the dates set forth in the written notice of
Corvallis, HealthFirst or Medford provided to such Dissenting Shareholder in
accordance with Section 60.567 of the Oregon Business Corporation Act shall be
deemed to be converted, as of the Effective Time, into the right to receive PPI
Class A Shares in accordance with the Exchange Ratio applicable to such Old PC
Shares.
SECTION 2.14 CLOSING. The consummation of the PC Reorganizations and the
Merger contemplated by this Agreement shall take place at the offices of
McDermott, Will & Emery, 2049 Century Park East--Suite 3400, Los Angeles,
California 90067, at 9:00 a.m., Pacific Standard Time, on the business day
immediately following the day on which all of the conditions set forth in
Article VII hereof are satisfied or waived or as soon as practicable thereafter,
or at such other date, time and place as the Companies shall agree.
SECTION 2.15 SUPPLEMENTARY ACTION. If, at any time after the Effective
Time, any further assignment or other action is necessary or desirable to vest
or to perfect or confirm or record in the Surviving Corporation the title to any
property or rights of Corvallis, HealthFirst or Medford, or otherwise to carry
out the provisions of this Agreement, the officers and directors of the
Surviving Corporation shall be authorized and empowered, in the name of and on
behalf of Corvallis, HealthFirst or Medford, as the case may be, to execute and
deliver any and all documents and instruments necessary or desirable to so vest
or
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to so perfect or confirm or record the title to such property or rights in the
Surviving Corporation and otherwise to carry out the provisions of this
Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
CORVALLIS, HEALTHFIRST AND MEDFORD
Each of Corvallis, HealthFirst and Medford hereby represents and warrants
(except (a) in the case of Corvallis, as set forth in the Disclosure Schedule
(the "Corvallis Disclosure Schedule") delivered by Corvallis to the other
Companies simultaneously with the execution of this Agreement, which Corvallis
Disclosure Schedule shall identify exceptions to the representations and
warranties set forth herein by reference to such Section numbers, (b) in the
case of HealthFirst, as set forth in the Disclosure Schedule (the "HealthFirst
Disclosure Schedule") delivered by HealthFirst to the other Companies
simultaneously with the execution of this Agreement, which HealthFirst
Disclosure Schedule shall identify exceptions to the representations and
warranties set forth herein by reference to such Section numbers and (c) in the
case of Medford, as set forth in the Disclosure Schedule (the "Medford
Disclosure Schedule") delivered by Medford to the other Companies simultaneously
with the execution of this Agreement, which Medford Disclosure Schedule shall
identify exceptions to the representations and warranties set forth herein by
reference to such Section numbers), with respect to itself only, to PPI and the
other Companies, as follows:
SECTION 3.1 ORGANIZATION. Such Company is a professional corporation duly
organized, validly existing and in good standing under the laws of the State of
Oregon and is qualified or licensed to do business and is in good standing in
each jurisdiction in which the ownership or leasing of property thereby or the
conduct of its business requires such qualification or license.
SECTION 3.2 AUTHORITY. (a) Such Company has all requisite corporate power
and authority to own, operate and lease its properties and to carry on its
business as it is now being conducted.
(b) Such Company has all requisite corporate power and authority to enter
into this Agreement. The execution and delivery of this Agreement by such
Company and the performance by such Company of its obligations hereunder have
been duly authorized by such Company's board of directors and no other corporate
proceeding on the part of such Company is necessary for the execution and
delivery of this Agreement by such Company or the performance by such Company of
its obligations hereunder (except for approval by the requisite votes cast by
such Company's shareholders at the meeting of such shareholders provided for in
Section 6.4 hereof). This Agreement has been duly and validly executed and
delivered by such Company and constitutes a valid and binding obligation of such
Company, enforceable in accordance with its terms (except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally and by
equitable principles).
SECTION 3.3 CAPITALIZATION. (a) As of July 29, 1996, (i) the authorized
capital stock of Corvallis consists of 200 shares of Class A Voting Preferred
Stock ("Corvallis Class A Shares"), 25,000 shares of Class B Voting Common Stock
("Corvallis Class B Shares") and 100,000 shares of Class C Non-Voting Preferred
Stock ("Corvallis Class C Shares") and (ii) there are issued and outstanding 67
Corvallis Class A Shares, 11,964 Corvallis Class B Shares and 8,420 Corvallis
Class C Shares. It is anticipated that, between the date hereof and the
Effective Time, Corvallis will issue employee stock options (the "Corvallis
Stock Options") exercisable for an aggregate of such number of Corvallis Class B
Shares (collectively, "Corvallis Option Shares") as is equal to the quotient
obtained by dividing (A) the Exchange Ratio applicable to Corvallis Class B
Shares into (B) 416,250; PROVIDED, HOWEVER, that in the event of a reduction in
the number of Corvallis FTE as of October 1, 1996 from the Corvallis FTE as of
June 1, 1996 only, the total number of Corvallis Option Shares shall be reduced
by an amount equal to the excess of (a) the then-current total number of
Corvallis Option Shares over (b) the quotient obtained by dividing (i) the
then-current Exchange Ratio for each Corvallis Class B Share determined after
giving effect to such reduction in the
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Corvallis FTE into (ii) the product of 5,000 multiplied by the Corvallis FTE as
of October 1, 1996. As of June 1, 1996, the aggregate number of full-time
equivalent providers who worked at Corvallis ("Corvallis FTE"), with
full-time-equivalence determined based on a workweek of at least four
full-working days, was 83.25. All of the outstanding Corvallis Class A Shares,
Corvallis Class B Shares and Corvallis Class C Shares have been validly issued
and are fully paid and nonassessable. There are no outstanding options,
warrants, subscriptions, conversions or other rights, agreements or commitments
obligating Corvallis to issue any additional Corvallis Class A Shares, Corvallis
Class B Shares or Corvallis Class C Shares or any other securities convertible
into, exchangeable for or evidencing the right to subscribe for any Corvallis
Class A Shares, Corvallis Class B Shares or Corvallis Class C Shares. There are
no voting trusts or other agreements or understandings to which Corvallis is a
party with respect to the voting of Corvallis Class A Shares, Corvallis Class B
Shares or Corvallis Class C Shares. The Corvallis Disclosure Schedule sets forth
(i) the names of persons who are shareholders of Corvallis as of July 29, 1996
and the number of shares of capital stock of Corvallis held by each such person
as of July 29, 1996 and to be held by such person as of the Effective Time, (ii)
the names of persons who are or will be eligible to become shareholders of
Corvallis between July 29, 1996 and the Effective Time and the number of shares
of capital stock of Corvallis to be held by each such person as of the Effective
Time and (iii) the names and number of full-time equivalent providers of
Corvallis as of June 1, 1996. On or before October 15, 1996, Corvallis shall
provide the other Companies an updated list of full-time equivalent providers of
Corvallis as of October 1, 1996.
(b) As of July 29, 1996, (i) the authorized capital stock of HealthFirst
consists of 1,400,000 shares of Class A Common Voting Shares, no par value, of
which 800,000 shares are Series 1 Class A Shares, 200,000 shares are Series 2
Class A Shares, 200,000 shares are Series 3 Class A Shares, 100,000 shares are
Series 4 Class A Shares and 100,000 shares are Series 5 Class A Shares, and (ii)
there are issued and outstanding 5,800 Series 1 Class A Shares and 2,200 Series
2 Class A Shares. It is anticipated that, between the date hereof and the
Effective Time, HealthFirst will issue employee stock options (the "HealthFirst
Stock Options") exercisable for an aggregate of 1,483 Series 1 Class A Shares of
HealthFirst (collectively, "HealthFirst Option Shares"); PROVIDED, HOWEVER, that
in the event of a reduction in the HealthFirst FTE as of October 1, 1996 from
the HealthFirst FTE as of June 1, 1996 only, the total number of HealthFirst
Option Shares shall be reduced by an amount equal to the excess of (a) 1,483
over (b) the quotient obtained by dividing (i) the then-current Exchange Ratio
for each Class A Share of HealthFirst determined after giving effect to such
reduction in the HealthFirst FTE into (ii) the product of 5,000 multiplied by
the HealthFirst FTE as of October 1, 1996. As of June 1, 1996, the aggregate
number of full-time equivalent providers who worked at HealthFirst ("HealthFirst
FTE"), with full-time-equivalence determined based on a workweek of at least
four full-working days, was 105. All of the outstanding Class A Shares of
HealthFirst have been validly issued and are fully paid and nonassessable. There
are no outstanding options, warrants, subscriptions, conversions or other
rights, agreements or commitments obligating HealthFirst to issue any additional
Class A Share of HealthFirst or any other securities convertible into,
exchangeable for or evidencing the right to subscribe for any Class A Share of
HealthFirst. There are no voting trusts or other agreements or understandings to
which HealthFirst is a party with respect to the voting of Class A Shares of
HealthFirst. The HealthFirst Disclosure Schedule sets forth (i) the names of
persons who are shareholders of HealthFirst as of July 29, 1996 and the number
of shares of capital stock of HealthFirst held by each such person as of July
29, 1996 and to be held by such person as of the Effective Time, (ii) the names
of persons who are or will be eligible to become shareholders of HealthFirst
between July 29, 1996 and the Effective Time and the number of shares of capital
stock of HealthFirst to be held by each such person as of the Effective Time and
(iii) the names and number of full-time equivalent providers of HealthFirst as
of June 1, 1996. On or before October 15, 1996, HealthFirst shall provide the
other Companies an updated list of full-time equivalent providers of HealthFirst
as of October 1, 1996.
(c) As of July 29, 1996, (i) the authorized capital stock of Medford
consists of 500 shares of par value common stock ("Medford Shares") and (ii)
there are issued and outstanding 57 Medford Shares. It is
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anticipated that, between the date hereof and the Effective Time, Medford will
issue employee stock options (the "Medford Stock Options") exercisable for an
aggregate of 10.6 Medford Shares (collectively, "Medford Option Shares");
PROVIDED, HOWEVER, that in the event of a reduction in the Medford FTE as of
October 1, 1996 from the Medford FTE as of June 1, 1996 only, the total number
of Medford Option Shares shall be reduced by an amount equal to the excess of
(a) 10.6 over (b) the quotient obtained by dividing (i) the then-current
Exchange Ratio for each share of Common Stock of Medford determined after giving
effect to such reduction in the Medford FTE into (ii) the product of 5,000
multiplied by the Medford FTE as of October 1, 1996. As of June 1, 1996, the
aggregate number of full-time-equivalent providers who worked at Medford
("Medford FTE"), with full-time-equivalence determined based on a workweek of at
least four full-working days, was 58. All of the outstanding Medford Shares have
been validly issued and are fully paid and nonassessable. There are no
outstanding options, warrants, subscriptions, conversions or other rights,
agreements or commitments obligating Medford to issue any additional Medford
Shares or any other securities convertible into, exchangeable for or evidencing
the right to subscribe for any Medford Shares. There are no voting trusts or
other agreements or understandings to which Medford is a party with respect to
the voting of Medford Shares. The Medford Disclosure Schedule sets forth (i) the
names of persons who are shareholders of Medford as of July 29, 1996 and the
number of shares of capital stock of Medford held by each such person as of July
29, 1996 and to be held by such person as of the Effective Time, (ii) the names
of persons who are or will be eligible to become shareholders of Medford between
July 29, 1996 and the Effective Time and the number of shares of capital stock
of Medford to be held by each such person as of the Effective Time and (iii) the
names and number of full-time equivalent providers of Medford as of June 1,
1996. On or before October 15, 1996, Medford shall provide the other Companies
an updated list of full-time equivalent providers of Medford as of October 1,
1996.
SECTION 3.4 SUBSIDIARIES. (a) Except as set forth on the Corvallis
Disclosure Schedule, Corvallis does not own, directly or indirectly, any
outstanding capital stock of or other ownership interest in (or securities,
rights or other interests convertible into capital stock or other ownership
interests) any person or entity and is not a member of a nonprofit corporation.
(b) Except as set forth on the HealthFirst Disclosure Schedule, HealthFirst
does not own, directly or indirectly, any outstanding capital stock of or other
ownership interest in (or securities, rights or other interests convertible into
capital stock or other ownership interests) any person or entity and is not a
member of a nonprofit corporation.
(c) Except as set forth on the Medford Disclosure Schedule, Medford does not
own, directly or indirectly, any outstanding capital stock of or other ownership
interest in (or securities, rights or other interests convertible into capital
stock or other ownership interests) any person or entity and is not a member of
a nonprofit corporation.
SECTION 3.5 NO CONFLICT. (a) Except as set forth on the Corvallis
Disclosure Schedule, the execution, delivery and performance of this Agreement
by Corvallis do not, or at the Effective Time will not, (i) conflict with or
violate any presently existing law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award applicable to Corvallis or by which
any of the assets or properties of Corvallis are bound or affected, (ii) violate
or conflict with the Articles of Incorporation or the Bylaws of Corvallis or
(iii) except as would not have a Material Adverse Effect (as such term is
hereinafter defined) with respect to Corvallis, result in any breach of, or
constitute a default (or event which with notice or lapse of time, or both,
would become a default) under, or accelerate the performance required by, or
require a prepayment or payment subject to premium or penalty under, or result
in the creation of any lien or other encumbrance on any of the assets or
properties of Corvallis pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument to
which Corvallis is a party or by which any of the assets or properties of
Corvallis are bound or affected. For purposes of this Agreement, the term
"Material Adverse Effect" means, with respect to any person or entity, a
material
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adverse effect on the business, assets, results of operations or financial
condition of such person or entity or in the ability of such person or entity to
perform its obligations under this Agreement.
(b) Except as set forth on the HealthFirst Disclosure Schedule, the
execution, delivery and performance of this Agreement by HealthFirst do not, or
at the Effective Time will not, (i) conflict with or violate any presently
existing law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award applicable to HealthFirst or by which any of the assets
or properties of HealthFirst are bound or affected, (ii) violate or conflict
with the Articles of Incorporation or the Bylaws of HealthFirst or (iii) except
as would not have a Material Adverse Effect (as such term is hereinafter
defined) with respect to HealthFirst, result in any breach of, or constitute a
default (or event which with notice or lapse of time, or both, would become a
default) under, or accelerate the performance required by, or require a
prepayment or payment subject to premium or penalty under, or result in the
creation of any lien or other encumbrance on any of the assets or properties of
HealthFirst pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument to which
HealthFirst is a party or by which any of the assets or properties of
HealthFirst are bound or affected.
(c) Except as set forth on the Medford Disclosure Schedule, the execution,
delivery and performance of this Agreement by Medford do not, or at the
Effective Time will not, (i) conflict with or violate any presently existing
law, rule, regulation, order, writ, judgment, injunction, decree, determination
or award applicable to Medford or by which any of the assets or properties of
Medford are bound or affected, (ii) violate or conflict with the Articles of
Incorporation or the Bylaws of Medford or (iii) except as would not have a
Material Adverse Effect (as such term is hereinafter defined) with respect to
Medford, result in any breach of, or constitute a default (or event which with
notice or lapse of time, or both, would become a default) under, or accelerate
the performance required by, or require a prepayment or payment subject to
premium or penalty under, or result in the creation of any lien or other
encumbrance on any of the assets or properties of Medford pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument to which Medford is a party or by which any of the
assets or properties of Medford are bound or affected.
SECTION 3.6 CONSENTS AND APPROVALS. Except for applicable requirements of
the Securities Act of 1933, as amended (referred to herein as the "Securities
Act"), the Securities Exchange Act of 1934, as amended (referred to herein as
the "Exchange Act"), state or foreign laws relating to takeovers, if applicable,
state securities or blue sky laws and, as applicable, filing and recordation by
the Surviving Corporation of the Certificate of Merger with the Secretary of
State of the State of Delaware as required by Delaware Law and the Articles of
Merger with the Secretary of State of the State of Oregon as required by the
Delaware Oregon, the execution and delivery of this Agreement by such Company do
not, and the performance of this Agreement by such Company will not, require any
consent, approval, authorization or other action by, or filing with or
notification to, any governmental authority, except such consents, approvals,
authorizations or actions the failure of which to obtain, or such filings or
notifications the failure of which to make, would not have a Material Adverse
Effect with respect to such Company.
SECTION 3.7 FINANCIAL STATEMENTS. (a) Corvallis has previously delivered
to the other Companies true and complete copies of the audited balance sheets of
Corvallis as at November 30, 1991, November 30, 1992, November 30, 1993,
November 30, 1994 and November 30, 1995 and the related audited statements of
income of Corvallis for the fiscal period ended on each such date, in each case
together with related notes thereto and accountant's reports thereon, true and
complete copies of which were included in the Corvallis Disclosure Schedule
(referred to herein, collectively, as the "Corvallis Financial Statements").
Each of the Corvallis Financial Statements presents fairly, in all material
respects, the financial position of Corvallis as of its date and the results of
operations and cash flow of Corvallis for the period indicated, and except for
the Corvallis Financial Statements as at November 30, 1991, November 30, 1992
and November 30, 1993 which have been prepared on the cash basis, all of the
other Corvallis Financial Statements have been prepared in accordance with
generally accepted accounting principles consistently
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applied ("GAAP"). Since November 30, 1995, there has been no material adverse
change in the business, condition (financial or otherwise), operations,
performance, properties or prospects of Corvallis.
(b) HealthFirst has previously delivered to the other Companies true and
complete copies of (i) the unaudited and unreviewed balance sheets of Suburban
Medical Clinic, Inc. ("Suburban") as at December 31, 1991, December 31, 1992,
December 31, 1993 and the related unaudited and reviewed statements of income of
Suburban for the fiscal year ended on each such date, (ii) the unaudited but
reviewed balance sheets of Suburban as at December 31, 1994 and December 31,
1995 in each case together with related notes thereto and accountant's reports
thereon and (iii) the unaudited but reviewed balance sheets of Metropolitan
Clinic, P.C. ("Metropolitan") as at December 31, 1991, December 31, 1992,
December 31, 1993, December 31, 1994 and December 31, 1995 and the related
unaudited and reviewed statements of income of Metropolitan for the fiscal year
ended on each such date, together with related notes thereto and accountant's
reports thereon true and complete copies of which were included in the
HealthFirst Disclosure Schedule (referred to herein, collectively, as the
"HealthFirst Financial Statements"). Each of the HealthFirst Financial
Statements presents fairly, in all material respects, the assets and liabilities
arising from cash transactions of Suburban, Metropolitan or HealthFirst, as the
case may be, as of its date and the results of operations of Suburban,
Metropolitan or HealthFirst, as the case may be, for the period indicated, and
all of the HealthFirst Financial Statements relating to Suburban have been
prepared on the accrual basis, all of the HealthFirst Financial Statements
relating to Metropolitan have been prepared on the modified cash basis and the
HealthFirst Financial Statements relating to HealthFirst have been prepared in
accordance with GAAP. Since November 30, 1995, there has been no material
adverse change in the business, condition (financial or otherwise), operations,
performance, properties or prospects of HealthFirst.
(c) Medford has previously delivered to the other Companies true and
complete copies of (i) the unaudited and unreviewed balance sheets of Medford as
at December 31, 1991, December 31, 1992, December 31, 1993 and December 31, 1995
and the related unaudited and unreviewed statements of income of Medford for the
fiscal year ended on each such date and (ii) the unaudited but reviewed balance
sheet of Medford as at December 31, 1994 and the related unaudited but reviewed
statements of income of Medford for the fiscal year ended on such date, together
with related notes thereto and accountant's reports thereon, true and complete
copies of which were included in the Medford Disclosure Schedule (referred to
herein, collectively, as the "Medford Financial Statements" and, together with
the Corvallis Financial Statements and the HealthFirst Financial Statements,
referred to herein, collectively, as the "PC Company Financial Statements").
Each of the Medford Financial Statements presents fairly, in all material
respects, the assets and liabilities arising from cash transactions of Medford
as of its date and the results of operations of Medford for the period
indicated, and all of the Medford Financial Statements have been prepared on the
income tax basis. Since November 30, 1995, there has been no material adverse
change in the business, condition (financial or otherwise), operations,
performance, properties or prospects of Medford.
SECTION 3.8 LITIGATION. (a) Except as set forth on the Corvallis
Disclosure Schedule, there are no claims, actions, proceedings or investigations
pending or, to the best of Corvallis' knowledge, threatened against Corvallis or
any of the assets or properties of Corvallis before any court, arbitrator or
administrative, governmental or regulatory authority or body that would have a
Material Adverse Effect with respect to Corvallis. Except as set forth on the
Corvallis Disclosure Schedule, there are no orders, writs, judgments,
injunctions, decrees, determinations or awards having a Material Adverse Effect
to which Corvallis is subject.
(b) Except as set forth on the HealthFirst Disclosure Schedule, there are no
claims, actions, proceedings or investigations pending or, to the best of
HealthFirst's knowledge, threatened against HealthFirst or any of the assets or
properties of HealthFirst before any court, arbitrator or administrative,
governmental or regulatory authority or body that would have a Material Adverse
Effect with respect to HealthFirst. Except as set forth on the HealthFirst
Disclosure Schedule, there are no orders, writs,
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judgments, injunctions, decrees, determinations or awards having a Material
Adverse Effect to which HealthFirst is subject.
(c) There are no claims, actions, proceedings or investigations pending or,
to the best of Medford's knowledge, threatened against Medford or any of the
assets or properties of Medford before any court, arbitrator or administrative,
governmental or regulatory authority or body that would have a Material Adverse
Effect with respect to Medford. There are no orders, writs, judgments,
injunctions, decrees, determinations or awards having a Material Adverse Effect
to which Medford is subject.
SECTION 3.9 LICENSES AND PERMITS. Such Company has all governmental
licenses, permits and authorizations necessary to carry on its business as it is
now being conducted, except for such governmental licenses, permits and
authorizations the absence of which would not have a Material Adverse Effect
with respect to such Company.
SECTION 3.10 PROPERTIES. (a) PC COMPANY REAL PROPERTY. (i) The Corvallis
Disclosure Schedule sets forth a complete list of all real property owned by
Corvallis ("Corvallis Real Property"). Corvallis Real Property is owned by
Corvallis free and clear of all liens, security interests, claims and other
charges and encumbrances, except (A) as set forth on the Corvallis Disclosure
Schedule, (B) liens for Taxes (as such term is defined in Section 3.17 hereof)
not yet payable and (C) liens for Taxes and other claims the validity of which
Corvallis is contesting in good faith, the existence of which, in the aggregate,
could not have a Material Adverse Effect with respect to Corvallis.
(ii) The HealthFirst Disclosure Schedule sets forth a complete list of all
real property owned by HealthFirst ("HealthFirst Real Property"). HealthFirst
Real Property is owned by HealthFirst free and clear of all liens, security
interests, claims and other charges and encumbrances, except (A) as set forth on
the HealthFirst Disclosure Schedule, (B) liens for Taxes (as such term is
defined in Section 3.17 hereof) not yet payable and (C) liens for Taxes and
other claims the validity of which HealthFirst is contesting in good faith, the
existence of which, in the aggregate, could not have a Material Adverse Effect
with respect to HealthFirst.
(iii) The Medford Disclosure Schedule sets forth a complete list of all real
property owned by Medford ("Medford Real Property" and, together with Corvallis
Property and HealthFirst Property, referred to herein, collectively, as the "PC
Company Real Property"). Medford Real Property is owned by Medford free and
clear of all liens, security interests, claims and other charges and
encumbrances, except (A) as set forth on the Medford Disclosure Schedule, (B)
liens for Taxes (as such term is defined in Section 3.17 hereof) not yet payable
and (C) liens for Taxes and other claims the validity of which Medford is
contesting in good faith, the existence of which, in the aggregate, could not
have a Material Adverse Effect with respect to Medford.
(b) PC COMPANY LEASES. (i) The Corvallis Disclosure Schedule sets forth a
complete list of all leases and subleases of real or personal property to which
Corvallis is a party ("Corvallis Leases"). Corvallis Leases are valid and
Corvallis is not, and to the best of Corvallis' knowledge no other party to any
Corvallis Lease is, in violation of, or in default under, any Corvallis Lease,
and no event or circumstance has occurred which constitutes or, after notice or
lapse of time or both would constitute, a violation or default thereunder on the
part of Corvallis or, to the best of Corvallis' knowledge, on the part of any
other party thereto.
(ii) The HealthFirst Disclosure Schedule sets forth a complete list of all
leases and subleases of real or personal property to which HealthFirst is a
party ("HealthFirst Leases"). HealthFirst Leases are valid and HealthFirst is
not, and to the best of HealthFirst's knowledge no other party to any
HealthFirst Lease is, in violation of, or in default under, any HealthFirst
Lease, and no event or circumstance has occurred which constitutes or, after
notice or lapse of time or both would constitute, a violation or default
thereunder on the part of HealthFirst or, to the best of HealthFirst's
knowledge, on the part of any other party thereto.
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(iii) The Medford Disclosure Schedule sets forth a complete list of all
leases and subleases of real or personal property to which Medford is a party
("Medford Leases"). Medford Leases are valid and Medford is not, and to the best
of Medford's knowledge no other party to any Medford Lease is, in violation of,
or in default under, any Medford Lease, and no event or circumstance has
occurred which constitutes or, after notice or lapse of time or both would
constitute, a violation or default thereunder on the part of Medford or, to the
best of Medford's knowledge, on the part of any other party thereto.
(c) PC COMPANY OTHER ASSETS. (i) The Corvallis Disclosure Schedule sets
forth a complete list of all tangible properties and assets owned, operated and
leased by Corvallis, other than Corvallis Real Property and Corvallis Leases.
(ii) The HealthFirst Disclosure Schedule sets forth a complete list of all
tangible properties and assets owned, operated and leased by HealthFirst, other
than HealthFirst Real Property and HealthFirst Leases.
(iii) The Medford Disclosure Schedule sets forth a complete list of all
tangible properties and assets owned, operated and leased by Medford, other than
Medford Real Property and Medford Leases.
(d) CONDITION AND COMPLIANCE. (i) Corvallis Real Property and Corvallis
Leases are (A) maintained in a state of repair and operating condition
consistent with good business practices, (B) to the best of Corvallis'
knowledge, in material compliance with all applicable laws, regulations and
ordinances, including, without limitation, building and zoning laws and (C)
suitable for the uses intended therefor.
(ii) HealthFirst Real Property and HealthFirst Leases are (A) maintained in
a state of repair and operating condition consistent with good business
practices, (B) to the best of HealthFirst's knowledge, in material compliance
with all applicable laws, regulations and ordinances, including building and
zoning laws, and (C) suitable for the uses intended therefor.
(iii) Medford Real Property and Medford Leases are (A) maintained in a state
of repair and operating condition consistent with good business practices, (B)
to the best of Medford's knowledge, in material compliance with all applicable
laws, regulations and ordinances, including building and zoning laws, and (C)
suitable for the uses intended therefor.
SECTION 3.11 MATERIAL CONTRACTS. (a) The Corvallis Disclosure Schedule
sets forth a list of all contracts, agreements and commitments to which
Corvallis is a party or by which Corvallis is bound, copies of which were
previously delivered to the other companies (referred to herein, collectively,
as the "Corvallis Material Contracts"), including, without limitation (i) all
contracts, partnership agreements, joint venture agreements and all other
agreements between Corvallis, on the one hand, and any provider, hospital,
health maintenance organization, other managed care organization or other
third-party provider, on the other hand, relating to the provision of medical or
consulting services, treatments, patient referrals or other similar activities,
(ii) Corvallis Leases, (iii) Corvallis Intellectual Property (as such term is
defined in Section 3.18(a) hereof), (iv) all indentures, mortgages, notes, loan
or credit agreements and other agreements and obligations relating to the
borrowing of money or to the direct or indirect guarantee or assumption of
obligations of third parties requiring Corvallis to make, or setting forth
conditions under which Corvallis would be required to make, aggregate future
payments in excess of $50,000 in any fiscal year or $100,000 in the aggregate,
(v) all agreements for capital improvements or acquisitions involving an amount
in excess of $25,000 in any fiscal year or $100,000 in the aggregate, (vi) all
written employment and consulting agreements providing benefits for directors,
officers or employees of Corvallis, (vii) all agreements not entered into in the
ordinary course of business involving an amount in excess of $25,000 in any
fiscal year or $100,000 in the aggregate, (viii) all agreements containing a
covenant limiting the freedom of Corvallis (or any provider employee of
Corvallis) to compete in any line of business with any person or entity or in
any geographic area or (ix) all written contracts and commitments to which
Corvallis is a party that require, in accordance with their respective terms,
aggregate future payments by Corvallis in excess of $50,000 in any fiscal year
or $100,000 in the aggregate and that are not cancelable by providing notice of
60 days or less. Each Corvallis Material Contract is in full force and effect
and Corvallis is not, nor, to the
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best of Corvallis' knowledge, is any other party to any such Corvallis Material
Contract, in violation of, or default under, any material provision of any such
Corvallis Material Contract, and no event or circumstance has occurred which
constitutes, or after notice or lapse of time or both would constitute, and the
consummation of the transactions contemplated hereby (including the Corvallis
Reorganization and the Merger) will not constitute, a violation or default
thereunder on the part of Corvallis or, to the best of Corvallis' knowledge, on
the part of any other party thereto.
(b) The HealthFirst Disclosure Schedule sets forth a list of all contracts,
agreements and commitments to which HealthFirst is a party or by which
HealthFirst is bound, copies of which were previously delivered to the other
Companies (referred to herein, collectively, as the "HealthFirst Material
Contracts"), including, without limitation (i) all contracts, partnership
agreements, joint venture agreements and all other agreements between
HealthFirst, on the one hand, and any provider, hospital, health maintenance
organization, other managed care organization or other third-party provider, on
the other hand, relating to the provision of medical or consulting services,
treatments, patient referrals or other similar activities, (ii) HealthFirst
Leases, (iii) HealthFirst Intellectual Property (as such term is defined in
Section 3.18(b) hereof), (iv) all indentures, mortgages, notes, loan or credit
agreements and other agreements and obligations relating to the borrowing of
money or to the direct or indirect guarantee or assumption of obligations of
third parties requiring HealthFirst to make, or setting forth conditions under
which HealthFirst would be required to make, aggregate future payments in excess
of $50,000 in any fiscal year or $100,000 in the aggregate, (v) all agreements
for capital improvements or acquisitions involving an amount in excess of
$25,000 in any fiscal year or $100,000 in the aggregate, (vi) all written
employment and consulting agreements providing benefits for directors, officers
or employees of HealthFirst, (viii) all agreements not entered into in the
ordinary course of business involving an amount in excess of $25,000 in any
fiscal year or $100,000 in the aggregate, (viii) all agreements containing a
covenant limiting the freedom of HealthFirst (or any provider employee of
HealthFirst) to compete in any line of business with any person or entity or in
any geographic area or (ix) all written contracts and commitments to which
HealthFirst is a party that require, in accordance with their respective terms,
aggregate future payments by HealthFirst in excess of $50,000 in any fiscal year
or $100,000 in the aggregate and that are not cancelable by providing notice of
60 days or less. Each HealthFirst Material Contract is in full force and effect
and HealthFirst is not, nor, to the best of HealthFirst's knowledge, is any
other party to any such HealthFirst Material Contract, in violation of, or
default under, any material provision of any such HealthFirst Material Contract,
and no event or circumstance has occurred which constitutes, or after notice or
lapse of time or both would constitute, and the consummation of the transactions
contemplated hereby (including the HealthFirst Reorganization and the Merger)
will not constitute, a violation or default thereunder on the part of
HealthFirst or, to the best of HealthFirst's knowledge, on the part of any other
party thereto.
(c) The Medford Disclosure Schedule sets forth a list of all contracts,
agreements and commitments to which Medford is a party or by which Medford is
bound, copies of which were previously delivered to the other Companies
(referred to herein, collectively, as the "Medford Material Contracts"),
including, without limitation (i) all contracts, partnership agreements, joint
venture agreements and all other agreements between Medford, on the one hand,
and any provider, hospital, health maintenance organization, other managed care
organization or other third-party provider or payor, on the other hand, relating
to the provision of medical or consulting services, treatments, patient
referrals or other similar activities, (ii) Medford Leases, (iii) Medford
Intellectual Property (as such term is defined in Section 3.18(c) hereof), (iv)
all indentures, mortgages, notes, loan or credit agreements and other agreements
and obligations relating to the borrowing of money or to the direct or indirect
guarantee or assumption of obligations of third parties requiring Medford to
make, or setting forth conditions under which Medford would be required to make,
aggregate future payments in excess of $50,000 in any fiscal year or $100,000 in
the aggregate, (v) all agreements for capital improvements or acquisitions
involving an amount in excess of $25,000 in any fiscal year or $100,000 in the
aggregate, (vi) all written employment and consulting agreements providing
benefits for directors, officers or employees of Medford, (vii) all agreements
not entered into in the ordinary course of business involving an amount in
excess of $25,000 in any fiscal year
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or $100,000 in the aggregate, (viii) all agreements containing a covenant
limiting the freedom of Medford (or any provider employee of Medford) to compete
in any line of business with any person or entity or in any geographic area or
(ix) all written contracts and commitments to which Medford is a party that
require, in accordance with their respective terms, aggregate future payments by
Medford in excess of $50,000 in any fiscal year or $100,000 in the aggregate and
that are not cancelable by providing notice of 60 days or less. Each Medford
Material Contract is in full force and effect and Medford is not, nor, to the
best of Medford's knowledge, is any other party to any such Medford Material
Contract, in violation of, or default under, any material provision of any such
Medford Material Contract, and no event or circumstance has occurred which
constitutes, or after notice or lapse of time or both would constitute, and the
consummation of the transactions contemplated hereby (including the Medford
Reorganization and the Merger) will not constitute, a violation or default
thereunder on the part of Medford or, to the best of Medford's knowledge, on the
part of any other party thereto.
SECTION 3.12 LABOR MATTERS. (a) Except as set forth on the Corvallis
Disclosure Schedule, in the event of termination of the employment of any of the
current officers, directors, employees or agents of Corvallis, neither Corvallis
nor any other Company or the Surviving Corporation will, pursuant to any
agreement or by reason of anything done prior to the Effective Time by
Corvallis, be liable to any of said officers, directors, employees or agents for
so-called "severance pay" or any other similar payments or benefits, including,
without limitation, post-employment health care or insurance benefits. As of the
date hereof, there is no slow-down or work stoppage. Corvallis is and has been
in compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, including, without limitation, the Immigration Reform Control
Act, the Worker Adjustment and Retraining Notification Act and such laws
respecting employment discrimination, equal opportunity, affirmative action,
workers' compensation, occupational safety and health requirements and
unemployment insurance and related matters, and are not engaged in and have not
engaged in any unfair labor practice. To the best knowledge of Corvallis, no
investigation or review by or before any governmental authority concerning any
violations of any such applicable laws is pending, nor is any such investigation
threatened or has any such investigation occurred during the last three years,
and no governmental authority has provided any notice to Corvallis or otherwise
asserted an intention to conduct any such investigation. Corvallis is not a
party to any collective bargaining agreement or other labor union contract.
Since December 31, 1992, there has not been any labor strike involving employees
of Corvallis.
(b) In the event of termination of the employment of any of the current
officers, directors, employees or agents of HealthFirst, neither HealthFirst nor
any other Company or the Surviving Corporation will, pursuant to any agreement
or by reason of anything done prior to the Effective Time by HealthFirst, be
liable to any of said officers, directors, employees or agents for so-called
"severance pay" or any other similar payments or benefits, including, without
limitation, post-employment health care or insurance benefits. As of the date
hereof, there is no slow-down or work stoppage. HealthFirst is and has been in
compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, including, without limitation, the Immigration Reform Control
Act, the Worker Adjustment and Retraining Notification Act and such laws
respecting employment discrimination, equal opportunity, affirmative action,
workers' compensation, occupational safety and health requirements and
unemployment insurance and related matters, and are not engaged in and have not
engaged in any unfair labor practice. To the best knowledge of HealthFirst, no
investigation or review by or before any governmental authority concerning any
violations of any such applicable laws is pending, nor is any such investigation
threatened or has any such investigation occurred during the last three years,
and no governmental authority has provided any notice to HealthFirst or
otherwise asserted an intention to conduct any such investigation. HealthFirst
is not a party to any collective bargaining agreement or other labor union
contract. Since December 31, 1992, there has not been any labor strike involving
employees of HealthFirst.
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(c) Except as set forth on the Medford Disclosure Schedule, in the event of
termination of the employment of any of the current officers, directors,
employees or agents of Medford, neither Medford nor any other Company or the
Surviving Corporation will, pursuant to any agreement or by reason of anything
done prior to the Effective Time by Medford, be liable to any of said officers,
directors, employees or agents for so-called "severance pay" or any other
similar payments or benefits, including, without limitation, post-employment
health care or insurance benefits. As of the date hereof, there is no slow-down
or work stoppage. Medford is and has been in compliance in all material respects
with all applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, including, without limitation,
the Immigration Reform Control Act, the Worker Adjustment and Retraining
Notification Act and such laws respecting employment discrimination, equal
opportunity, affirmative action, workers' compensation, occupational safety and
health requirements and unemployment insurance and related matters, and are not
engaged in and have not engaged in any unfair labor practice. To the best
knowledge of Medford, no investigation or review by or before any governmental
authority concerning any violations of any such applicable laws is pending, nor
is any such investigation threatened or has any such investigation occurred
during the last three years, and no governmental authority has provided any
notice to Medford or otherwise asserted an intention to conduct any such
investigation. Medford is not a party to any collective bargaining agreement or
other labor union contract. Since December 31, 1992, there has not been any
labor strike involving employees of Medford.
SECTION 3.13 EMPLOYEE BENEFIT PLANS. (a) None of the Employee Plans (as
such term is hereinafter defined) of such Company is a multi-employer plan (as
such term is defined in Section 3(37) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")). To the best of such Company's knowledge,
since December 31, 1992, all of such Company's Employee Plans have been
maintained, operated and administered in compliance in all material respects
with the requirements prescribed by any and all applicable statutes, orders and
governmental rules and regulations currently in effect with respect thereto, and
such Company has performed all material obligations required to be performed
thereby under, and is not in any material respect in default or in violation of,
any of its Employee Plans. Each of the Employee Plans of such Company intended
to be qualified under Section 401(m) of the Code has heretofore been determined
by the Internal Revenue Service to be so qualified, and each trust created
thereunder has heretofore been determined by the Internal Revenue Service to be
exempt from tax under the provisions of Section 501(a) of the Code and nothing
has occurred since the date of such determination of qualification that would
result in the loss of such exemption. There exists no accumulated funding
deficiency, whether or not waived, with respect to any of the Employee Plans of
such Company. To the best of such Company's knowledge, there have been no
prohibited transactions with respect to any of the Employee Plans of such
Company that would result in any material liability or excise tax under ERISA or
the Code. Such Company has not incurred, and does not reasonably expect to incur
(i) any material liability to the Pension Benefit Guaranty Corporation, (ii) any
liability to a trustee under Section 4049 of ERISA or (iii) any "withdrawal
liability" (within the meaning of Section 4201 of ERISA), in each case with
respect to events occurring on or prior to the Effective Time. Since December
31, 1992, there has been no change in the financial condition of any of the
Employee Plans of such Company which is a "funded defined benefit plan" (within
the meaning of Section 3(35) of ERISA), other than changes which would not have
a Material Adverse Effect with respect to such Company. All benefits, expenses
and other amounts due and payable under any Employee Plan of such Company, and
all contributions, transfers and payments required to be made to any Employee
Plan of such Company, have been, or shall be prior to the Effective Time, paid
or made, or accrued and booked, on or before the Effective Time. There are no
"leased employees" (within the meaning of Section 414(n) of the Code) who
perform services for such Company. There are no actions, suits or claims pending
or, to the best of such Company's knowledge, threatened with respect to any
Employee Plan of such Company, other than routine claims for benefits. To the
best of such Company's knowledge, there has not occurred, nor is there
continuing, any transaction or breach of fiduciary duty under applicable law
which could have a Material Adverse Effect with respect to such Company or a
material adverse effect on any Employee Plan of such
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Company. For purposes of this Agreement, the term "Employee Plans" of a person
or entity means (A) all "employee benefit plans" (as such term is defined in
Section 3(3) of ERISA) in which employees or former employees of such person or
entity participate and (B) all other deferred compensation, excess benefit,
stock and severance programs in which employees or former employees of such
person or entity presently participate.
(b) Such Company has delivered or made available to the other Companies full
and complete copies of all of the Employee Plans of such Company.
SECTION 3.14 COMPLIANCE WITH APPLICABLE LAW. (a) Except as set forth on
the Corvallis Disclosure Schedule, to the best of Corvallis' knowledge,
Corvallis is not, nor since December 31, 1992 has Corvallis been, engaged in an
activity, nor has Corvallis omitted to take any action, as a result of which
Corvallis is or has been in violation of any law, ordinance, regulation or other
requirement of any governmental authority applicable to Corvallis, including,
without limitation, all applicable health care laws, rules and regulations
relating to the payment or receipt of illegal remuneration (referred to herein,
collectively, as the "Fraud and Abuse Laws") and physician self-referral
prohibitions (e.g., the "Stark" law), which would have a Material Adverse Effect
with respect to Corvallis, nor has there been a pattern of violation of any law,
ordinance, regulation or other requirement of any governmental authority
applicable to Corvallis. No investigation or review by any governmental
authority concerning any possible such violation by Corvallis is pending or, to
the best of Corvallis' knowledge, threatened, nor has any governmental authority
indicated an intention to conduct any such investigation or review.
(b) Except as set forth on the HealthFirst Disclosure Schedule, to the best
of HealthFirst's knowledge, HealthFirst is not, nor since December 31, 1992 has
HealthFirst been, engaged in an activity, nor has HealthFirst omitted to take
any action, as a result of which HealthFirst is or has been in violation of any
law, ordinance, regulation or other requirement of any governmental authority
applicable to HealthFirst, including, without limitation, the Fraud and Abuse
Laws and physician self-referral prohibitions (e.g., the "Stark" law), which
would have a Material Adverse Effect with respect to HealthFirst, nor has there
been a pattern of violation of any law, ordinance, regulation or other
requirement of any governmental authority applicable to HealthFirst. No
investigation or review by any governmental authority concerning any possible
such violation by HealthFirst is pending or, to the best of HealthFirst's
knowledge, threatened, nor has any governmental authority indicated an intention
to conduct any such investigation or review.
(c) Except as set forth on the Medford Disclosure Schedule, to the best of
Medford's knowledge, Medford is not, nor since December 31, 1992 has Medford
been, engaged in an activity, nor has Medford omitted to take any action, as a
result of which Medford is or has been in violation of any law, ordinance,
regulation or other requirement of any governmental authority applicable to
Medford, including, without limitation, the Fraud and Abuse Laws and physician
self-referral prohibitions (e.g., the "Stark" law), which would have a Material
Adverse Effect with respect to Medford, nor has there been a pattern of
violation of any law, ordinance, regulation or other requirement of any
governmental authority applicable to Medford. No investigation or review by any
governmental authority concerning any possible such violation by Medford is
pending or, to the best of Medford's knowledge, threatened, nor has any
governmental authority indicated an intention to conduct any such investigation
or review.
SECTION 3.15 ABSENCE OF CERTAIN CHANGES AND UNDISCLOSED LIABILITIES. Since
November 30, 1995, such Company has not (a) suffered any Material Adverse
Effect, (b) except for the transactions contemplated by this Agreement, entered
into any material commitment or transaction, or conducted its business and
operations other than in the ordinary course of business and consistent with
past practice, (c) made any declaration, set aside or paid any dividend or other
distribution (whether in cash, property or any combination thereof) in respect
of shares of its capital stock or redeemed or otherwise acquired any shares of
its capital stock, (d) incurred any liabilities or obligations ("Liabilities")
that would be required to be included on a balance sheet, or in the notes
thereto, prepared in accordance with GAAP or on the basis of cash receipts and
disbursements, as applicable, except (i) Liabilities incurred in the ordinary
course of
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business and consistent with past practice and (ii) Liabilities incurred in
connection with or as a result of the transactions contemplated hereunder, (e)
amended or modified its Articles of Incorporation or Bylaws, (f) granted or
become obligated to grant any increase in compensation to its employees except
in the ordinary course of business, or (g) agreed to take, whether in writing or
otherwise, any action which, if taken prior to the date hereof, would have made
any representation or warranty described in this Article III untrue or incorrect
in any material respect.
SECTION 3.16 TAXES. (a) All federal, state, county and other tax returns,
reports and declarations of every nature, including, without limitation, income,
employment, payroll, excise, property, sales and use taxes and unemployment
contributions imposed by any federal, state or local governmental authority
(referred to herein, collectively, as "Taxes"), required to be filed by or on
behalf of, or with respect to, Corvallis have been duly and timely filed, or
will be filed prior to the Effective Time and within the time periods required
by law by Corvallis. Copies of all such returns or reports have been provided to
the other Companies. Except as set forth on the Corvallis Disclosure Schedule,
all such returns or reports (a) are, or will be at the time of filing thereof,
in accordance with the tax laws applicable thereto and (b) accurately reflect,
or will accurately reflect at the time of filing thereof, all such Taxes
required to be paid by Corvallis for the periods covered thereby. No extension
of time, or request therefor or waiver thereof, has been made or are presently
pending or effective with respect to any such return, report or Taxes. All Taxes
shown to be due and payable on such returns and reports and all deficiencies,
assessments, penalties and interest thereon have been paid. All required tax
estimates, deposits and prepayments for current periods have been properly made.
There are no tax liens on any of the assets of Corvallis and, to the best of
Corvallis' knowledge, no basis exists for the imposition of any such liens.
Corvallis has no dispute with any taxing authority as to Taxes of any nature.
Except as set forth on the Corvallis Disclosure Schedule, there is no unassessed
tax deficiency proposed or, to the best of Corvallis' knowledge, threatened
against Corvallis, and no action, proceeding or audit with respect to any of
Corvallis' returns or reports by any governmental authority is pending or, to
the best of Corvallis' knowledge, threatened by any governmental authority for
assessment, reassessment or collection of any Taxes against Corvallis or its
operations.
(b) Except as set forth on the HealthFirst Disclosure Schedule, all federal,
state, county and other tax returns, reports and declarations of every nature,
including Taxes, required to be filed by or on behalf of, or with respect to,
HealthFirst have been duly and timely filed, or will be filed prior to the
Effective Time and within the time periods required by law by HealthFirst.
Copies of all such returns or reports have been provided to the other Companies.
Except as set forth on the HealthFirst Disclosure Schedule, all such returns or
reports (a) are, or will be at the time of filing thereof, in accordance with
the tax laws applicable thereto and (b) accurately reflect, or will accurately
reflect at the time of filing thereof, all such Taxes required to be paid by
HealthFirst for the periods covered thereby. No extension of time, or request
therefor or waiver thereof, has been made or are presently pending or effective
with respect to any such return, report or Taxes. All Taxes shown to be due and
payable on such returns and reports and all deficiencies, assessments, penalties
and interest thereon have been paid. All required tax estimates, deposits and
prepayments for current periods have been properly made. There are no tax liens
on any of the assets of HealthFirst and, to the best of HealthFirst's knowledge,
no basis exists for the imposition of any such liens. HealthFirst has no dispute
with any taxing authority as to Taxes of any nature. Except as set forth on the
HealthFirst Disclosure Schedule, there is no unassessed tax deficiency proposed
or, to the best of HealthFirst's knowledge, threatened against HealthFirst, and
no action, proceeding or audit with respect to any of HealthFirst's returns or
reports by any governmental authority is pending or, to the best of
HealthFirst's knowledge, threatened by any governmental authority for
assessment, reassessment or collection of any Taxes against HealthFirst or its
operations.
(c) All federal, state, county and other tax returns, reports and
declarations of every nature, including Taxes, required to be filed by or on
behalf of, or with respect to, Medford have been duly and timely filed, or will
be filed prior to the Effective Time and within the time periods required by law
by Medford. Copies of all such returns or reports have been provided to the
other Companies. Except as set forth on the
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Medford Disclosure Schedule, all such returns or reports (a) are, or will be at
the time of filing thereof, in accordance with the tax laws applicable thereto
and (b) accurately reflect, or will accurately reflect at the time of filing
thereof, all such Taxes required to be paid by Medford for the periods covered
thereby. No extension of time, or request therefor or waiver thereof, has been
made or are presently pending or effective with respect to any such return,
report or Taxes. All Taxes shown to be due and payable on such returns and
reports and all deficiencies, assessments, penalties and interest thereon have
been paid. All required tax estimates, deposits and prepayments for current
periods have been properly made. There are no tax liens on any of the assets of
Medford and, to the best of Medford's knowledge, no basis exists for the
imposition of any such liens. Medford has no dispute with any taxing authority
as to Taxes of any nature. Except as set forth on the Medford Disclosure
Schedule, there is no unassessed tax deficiency proposed or, to the best of
Medford's knowledge, threatened against Medford, and no action, proceeding or
audit with respect to any of Medford's returns or reports by any governmental
authority is pending or, to the best of Medford's knowledge, threatened by any
governmental authority for assessment, reassessment or collection of any Taxes
against Medford or its operations.
SECTION 3.17 HEALTH AND ENVIRONMENTAL MATTERS.
(a) COMPLIANCE WITH ENVIRONMENTAL LAWS. Such Company is in compliance with
all applicable "Environmental Laws" (as such term is hereinafter defined) in
connection with the ownership, operation and condition of all aspects of its
properties and businesses and otherwise, except for any such noncompliance which
would not have a Material Adverse Effect with respect to such Company. For
purposes of this Agreement, "Environmental Laws" means any and all laws,
statutes, ordinances, rules, regulations, orders and determinations of any
governmental authority of the United States, any state or any political
subdivision of any state or political subdivision thereof pertaining to health
or the environment (including, without limitation (i) the Clean Air Act, as
amended, (ii) the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, (iii) the Resource Conservation and Recovery
Act of 1976, as amended, (iv) the Federal Water Pollution Control Act, as
amended, (v) the Safe Drinking Water Act, as amended, and (vi) the Toxic
Substances Control Act, as amended.
(b) VIOLATIONS OF ENVIRONMENTAL LAWS. Such Company has not (i) generated,
treated, stored, disposed of, transported or handled any hazardous substance,
hazardous waste, solid waste or pollutant or contaminant or (ii) released into
the environment any hazardous substance, hazardous waste, solid waste or
pollutant or contaminant, in any case in violation of any applicable
Environmental Law or under circumstances which have subjected, or may subject,
such Company to any indemnity or remedial obligation under any Environmental Law
or any contract or agreement with another party.
(c) EXISTING CONDITIONS. There is and has been no (i) soil, surface water
or groundwater contamination affecting any PC Company Real Property of such
Company, (ii) asbestos-containing material installed in any such PC Company Real
Property, (iii) polychlorinated biphenyls deposited at any such PC Company Real
Property or (iv) illness, disability, injury or death of any person or entity
(including, without limitation, any employee or former employee of such Company
or any person or entity employed at any such PC Company Real Property) in any
way arising out of exposure to substances or conditions present at any such PC
Company Real Property which would have a Material Adverse Effect with respect to
such Company.
SECTION 3.18 INTELLECTUAL PROPERTY. (a) The Corvallis Disclosure Schedule
sets forth a full and complete list of all patents, trademarks, service marks,
trade names and franchises with third parties, all applications therefor and all
permits, grants and licenses and other rights to intellectual property involving
Corvallis that are material to the business of Corvallis (referred to herein,
collectively, as "Corvallis Intellectual Property"). Corvallis has free and
unencumbered rights to use all of such Corvallis Intellectual Property, except
for rights the failure of which to possess would not have a Material Adverse
Effect with respect to Corvallis. Corvallis has not received notice of any claim
challenging the free and unencumbered right of Corvallis to use such Corvallis
Intellectual Property.
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(b) The HealthFirst Disclosure Schedule sets forth a full and complete list
of all patents, trademarks, service marks, trade names and franchises with third
parties, all applications therefor and all permits, grants and licenses and
other rights to intellectual property involving HealthFirst that are material to
the business of HealthFirst (referred to herein, collectively, as "HealthFirst
Intellectual Property"). HealthFirst has free and unencumbered rights to use all
of such HealthFirst Intellectual Property, except for rights the failure of
which to possess would not have a Material Adverse Effect with respect to
HealthFirst. HealthFirst has not received notice of any claim challenging the
free and unencumbered right of HealthFirst to use such HealthFirst Intellectual
Property.
(c) The Medford Disclosure Schedule sets forth a full and complete list of
all patents, trademarks, service marks, trade names and franchises with third
parties, all applications therefor and all permits, grants and licenses and
other rights to intellectual property involving Medford that are material to the
business of Medford (referred to herein, collectively, as "Medford Intellectual
Property"). Medford has free and unencumbered rights to use all of such Medford
Intellectual Property, except for rights the failure of which to possess would
not have a Material Adverse Effect with respect to Medford. Medford has not
received notice of any claim challenging the free and unencumbered right of
Medford to use such Medford Intellectual Property.
SECTION 3.19 INSURANCE.
(a) The Corvallis Disclosure Schedule sets forth a full and complete list of
all insurance policies naming Corvallis as an insured or beneficiary or as a
loss payee or with respect to which Corvallis has paid all or part of the
premium in force on July 29, 1996. All of such policies are in full force and
effect, and no such policy has been interrupted during the past two years.
(b) The HealthFirst Disclosure Schedule sets forth a full and complete list
of all insurance policies naming HealthFirst as an insured or beneficiary or as
a loss payee or with respect to which HealthFirst has paid all or part of the
premium in force on July 29, 1996. All of such policies are in full force and
effect, and no such policy has been interrupted during the past two years.
(c) The Medford Disclosure Schedule sets forth a full and complete list of
all insurance policies naming Medford as an insured or beneficiary or as a loss
payee or with respect to which Medford has paid all or part of the premium in
force on July 29, 1996. All of such policies are in full force and effect, and
no such policy has been interrupted during the past two years.
SECTION 3.20. INFORMATION IN DISCLOSURE DOCUMENTS AND REGISTRATION
STATEMENT. None of the information to be supplied by such Company to be
included in (a) the Registration Statement on Form S-4 to be filed with the
Securities and Exchange Commission (referred to herein as the "SEC") by PPI
under the Securities Act for the purpose of registering PPI Class A Shares to be
issued in the Merger or pursuant to this Agreement (referred to herein as the
"Registration Statement") and (b) the joint proxy statement/ prospectus to be
distributed in connection with the meetings of shareholders of the Companies to
vote upon this Agreement (referred to herein as the "Joint Proxy Statement"),
will, in the case of the Registration Statement, at the time it becomes
effective and at the Effective Time, or, in the case of the Joint Proxy
Statement or any amendments thereof or supplements thereto, at the time of the
mailing of the Joint Proxy Statement and any amendments or supplements thereto,
and at the time of each of the meetings of shareholders to be held in connection
with the Merger, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The Registration Statement insofar as it pertains to such
Company will comply as to form in all material respects with the provisions of
the Securities Act, and the rules and regulations promulgated thereunder. The
Joint Proxy Statement insofar as it pertains to such Company will comply as to
form in all material respects with the provisions of the Exchange Act, and the
rules and regulations promulgated thereunder.
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SECTION 3.21 CORPORATE RECORDS OF COMPANY. Such Company has caused to be
delivered to the other Companies true, accurate and complete copies of (a) the
Articles of Incorporation and Bylaws of such Company, as currently in effect,
and (b) records of all proceedings of incorporators, shareholders, directors and
committees of directors of such Company during the past five years. The books
and records of such Company have been maintained in accordance with good
business practices.
SECTION 3.22 NO FINDERS. No broker, finder or investment banker is
entitled to any fee or commission from such Company in connection with the
transactions contemplated by this Agreement.
SECTION 3.23 TAX REPRESENTATIONS. (a)(i) No part of the consideration to
be distributed by Corvallis to its shareholders in connection with the Corvallis
Distribution will be received by any such shareholder as a creditor, employee or
in any capacity other than that of a shareholder of Corvallis.
(ii) The Corvallis Financial Statements are representative of the present
operations of Corvallis and there have been no substantial operational changes
since the date of each of the Corvallis Financial Statements.
(iii) Following the Corvallis Distribution, Corvallis (except in connection
with the Merger as contemplated by this Agreement) and Corvallis New PC will
each continue the active conduct of its business, independently and with its
separate employees.
(iv) There is no plan or intention by either Corvallis or Corvallis New PC,
directly or through any subsidiary thereof, to purchase any of the outstanding
shares of its capital stock after the Corvallis Distribution.
(v) There is no plan or intention on the part of Corvallis New PC to issue
any additional shares of its capital stock or securities subsequent to the
distribution of the shares of capital stock of Corvallis New PC.
(vi) Immediately after the distribution of the shares of capital stock of
Corvallis New PC, neither Corvallis nor Corvallis New PC will have any
outstanding warrants, options, convertible securities or any other type of right
pursuant to which any person will be entitled to acquire shares of capital stock
of Corvallis New PC.
(vii) There is no plan or intention (except in connection with the Merger
contemplated by this Agreement) to liquidate either Corvallis or Corvallis New
PC, to merge either entity with any other entity, or to sell or otherwise
dispose of the assets of either entity after the transaction, except in the
ordinary course of business.
(viii) The total adjusted basis and fair market value of the assets to be
transferred to Corvallis New PC by Corvallis will each equal or exceed the sum
of the liabilities to be assumed by Corvallis New PC plus any liabilities to
which the transferred assets will be subject.
(ix) The liabilities to be assumed in the Corvallis Distribution and the
liabilities to which the transferred assets will be subject will have been
incurred in the ordinary course of business and will be associated with the
assets to be transferred.
(x) No intercorporate debt will exist between Corvallis and Corvallis New PC
at the time of, or immediately subsequent to, the distribution of the shares of
capital stock of Corvallis New PC.
(xi) All transactions between Corvallis and Corvallis New PC will be for
arm's length consideration.
(xii) No two parties to the Corvallis Distribution are investment companies
as defined in Section 368(a)(2)(F)(iii) and (v) of the Code.
(xiii) The cost savings to be achieved by the Corvallis Distribution are not
federal tax savings.
(b)(i) No part of the consideration to be distributed by HealthFirst to its
shareholders in connection with the HealthFirst Distribution will be received by
any such shareholder as a creditor, employee or in any capacity other than that
of a shareholder of HealthFirst.
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(ii) The HealthFirst Financial Statements are representative of the present
operations of HealthFirst and there have been no substantial operational changes
since the date of each of the HealthFirst Financial Statements.
(iii) Following the HealthFirst Distribution, HealthFirst (except in
connection with the Merger as contemplated by this Agreement) and HealthFirst
New PC will each continue the active conduct of its business, independently and
with its separate employees.
(iv) There is no plan or intention by either HealthFirst or HealthFirst New
PC, directly or through any subsidiary thereof, to purchase any of the
outstanding shares of its capital stock after the HealthFirst Distribution.
(v) There is no plan or intention on the part of HealthFirst New PC to issue
any additional shares of its capital stock or securities subsequent to the
distribution of the shares of capital stock of HealthFirst New PC.
(vi) Immediately after the distribution of the shares of capital stock of
HealthFirst New PC, neither HealthFirst nor HealthFirst New PC will have any
outstanding warrants, options, convertible securities or any other type of right
pursuant to which any person will be entitled to acquire shares of capital stock
of HealthFirst New PC.
(vii) There is no plan or intention (except in connection with the Merger
contemplated by this Agreement) to liquidate either HealthFirst or HealthFirst
New PC, to merge either entity with any other entity, or to sell or otherwise
dispose of the assets of either entity after the transaction, except in the
ordinary course of business.
(viii) The total adjusted basis and fair market value of the assets to be
transferred to HealthFirst New PC by HealthFirst will each equal or exceed the
sum of the liabilities to be assumed by HealthFirst New PC plus any liabilities
to which the transferred assets will be subject.
(ix) The liabilities to be assumed in the HealthFirst Distribution and the
liabilities to which the transferred assets will be subject will have been
incurred in the ordinary course of business and will be associated with the
assets to be transferred.
(x) No intercorporate debt will exist between HealthFirst and HealthFirst
New PC at the time of, or immediately subsequent to, the distribution of the
shares of capital stock of HealthFirst New PC.
(xi) All transactions between HealthFirst and HealthFirst New PC will be for
arm's length consideration.
(xii) No two parties to the HealthFirst Distribution are investment
companies as defined in Section 368(a)(2)(F)(iii) and (v) of the Code.
(xiii) The cost savings to be achieved by the HealthFirst Distribution are
not federal tax savings.
(c)(i) No part of the consideration to be distributed by Medford to its
shareholders in connection with the Medford Distribution will be received by any
such shareholder as a creditor, employee or in any capacity other than that of a
shareholder of Medford.
(ii) The Medford Financial Statements are representative of the present
operations of Medford and there have been no substantial operational changes
since the date of each of the Medford Financial Statements.
(iii) Following the Medford Distribution, Medford (except in connection with
the Merger as contemplated by this Agreement) and Medford New PC will each
continue the active conduct of its business, independently and with its separate
employees.
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(iv) There is no plan or intention by either Medford or Medford New PC,
directly or through any subsidiary thereof, to purchase any of the outstanding
shares of its capital stock after the Medford Distribution.
(v) There is no plan or intention on the part of Medford New PC to issue any
additional shares of its capital stock or securities subsequent to the
distribution of the shares of capital stock of Medford New PC.
(vi) Immediately after the distribution of the shares of capital stock of
Medford New PC, neither Medford nor Medford New PC will have any outstanding
warrants, options, convertible securities or any other type of right pursuant to
which any person will be entitled to acquire shares of capital stock of Medford
New PC.
(vii) There is no plan or intention (except in connection with the Merger
contemplated by this Agreement) to liquidate either Medford or Medford New PC,
to merge either entity with any other entity, or to sell or otherwise dispose of
the assets of either entity after the transaction, except in the ordinary course
of business.
(viii) The total adjusted basis and fair market value of the assets to be
transferred to Medford New PC by Medford will each equal or exceed the sum of
the liabilities to be assumed by Medford New PC plus any liabilities to which
the transferred assets will be subject.
(ix) The liabilities to be assumed in the Medford Distribution and the
liabilities to which the transferred assets will be subject will have been
incurred in the ordinary course of business and will be associated with the
assets to be transferred.
(x) No intercorporate debt will exist between Medford and Medford New PC at
the time of, or immediately subsequent to, the distribution of the shares of
capital stock of Medford New PC.
(xi) Payments made in connection with all continuing transactions between
Medford and Medford New PC will be for arm's length consideration.
(xii) No two parties to the Medford Distribution are investment companies as
defined in Section 368(a)(2)(F)(iii) and (v) of the Code.
(xiii) The cost savings to be achieved by the Medford Distribution are not
federal tax savings.
ARTICLE IV
REPRESENTATION AND WARRANTIES OF PPI
PPI hereby represents and warrants to Corvallis, HealthFirst and Medford as
follows:
SECTION 4.1 ORGANIZATION. PPI is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. PPI has
neither engaged in any business activity nor entered into any contract or
assumed any liability since the date of its incorporation other than in
connection with transactions contemplated hereby.
SECTION 4.2 AUTHORITY. PPI has all requisite corporate power and authority
to enter into this Agreement. The execution and delivery of this Agreement by
PPI and the performance by PPI of its obligations hereunder have been duly
authorized by PPI's board of directors and no other corporate proceeding on the
part of PPI is necessary for the execution and delivery of this Agreement by PPI
and the performance by PPI of its obligations hereunder. This Agreement has been
duly and validly executed and delivered by PPI and constitutes a valid and
binding obligation of PPI, enforceable in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by equitable principles).
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SECTION 4.3 CAPITALIZATION. As of the date hereof, the authorized capital
stock of PPI consists of 100,000,000 shares (collectively, "PPI Shares")
consisting of: (a) 50,000,000 shares of Common Stock, par value $0.01 par share
("Common Stock"), of which 20,000,000 shares are designated as Class A Common
Stock and 30,000,000 shares of which are designated as Class B Common Stock, and
(b) 50,000,000 shares of Preferred Stock, par value $0.01 per share. As of the
date hereof, 3,000 PPI Class A Shares have been issued and are outstanding, with
each of the Companies holding 1,000 PPI Class A Shares. There are no outstanding
options, warrants, subscriptions, conversions or other rights, agreements or
commitments obligating PPI to issue any additional PPI Shares or any other
securities convertible into, exchangeable for or evidencing the right to
subscribe for any PPI Shares. There are no voting trusts or other agreements or
understandings to which PPI is a party with respect to the voting of PPI Shares.
SECTION 4.4 NO FINDERS. No broker, finder or investment banker is entitled
to any fee or commission from PPI in connection with the transactions
contemplated by this Agreement.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.1 CONDUCT OF BUSINESS BY CORVALLIS, HEALTHFIRST AND
MEDFORD. (a) Except as contemplated by this Agreement, during the period from
the date of this Agreement until the Effective Time, each of Corvallis,
HealthFirst and Medford shall (i) conduct its operations only in, and not take
any action except in, the ordinary course of business and consistent with past
practice and (ii) use all reasonable efforts to (A) preserve intact its business
organization, (B) keep available the services of its officers and employees and
(C) maintain satisfactory relationships with licensors, licensees, suppliers,
contractors, distributors, customers, business partners and others with which it
has business relationships.
(b) Without limiting the generality of the foregoing, other than as
contemplated by this Agreement or as set forth on each Company's Disclosure
Schedule, each of Corvallis, HealthFirst and Medford agrees that it shall not,
prior to the Effective Time, without the prior written consent of the other
Companies:
(i) split, combine or reclassify, or directly or indirectly redeem,
purchase or otherwise acquire, shares of its capital stock;
(ii) declare, pay or set aside for payment any distribution in respect
of shares of its capital stock; PROVIDED, HOWEVER, that in the event that
the quotient obtained by dividing (A) the Corvallis FTE, the HealthFirst FTE
or the Medford FTE as of June 1, 1996 into (B) the excess of total assets
over total liabilities of Corvallis, HealthFirst or Medford, as applicable
(such Company's "FTE Net Shareholder Equity"), as reflected on the balance
sheet thereof as at June 30, 1996, reviewed by Arthur Andersen LLP and
delivered to the Companies no later than November 15, 1996, which reviewed
balance sheet shall be adjusted (except in the case of HealthFirst) by
changing the value of any real estate specified thereon from book value to
fair market value based on fair market value appraisals prepared by
appraisers reasonably acceptable to the other Companies during the past
20-month period, exceeds the FTE Net Shareholder Equity of any other Company
by more than 20 percent (the "Minimum Net Equity Threshold"), such Company
may make a distribution to its shareholders in an amount equal to the
product of (y) the amount of such excess of such Company's FTE Net
Shareholder Equity over the Minimum Net Equity Threshold multiplied by (z)
such Company's FTE as of June 1, 1996. Such reviewed balance sheets and such
fair market appraisals shall, absent manifest error, be conclusive and
binding for purposes of determining each Company's FTE Net Shareholder
Equity;
(iii) authorize for issuance, issue, sell, pledge, dispose of or
encumber, deliver or agree or commit to issue, sell, pledge or deliver
(whether through the issuance or granting of any options, warrants,
commitments, subscriptions, rights to purchase or otherwise) shares of its
capital stock or any securities convertible into or exercisable or
exchangeable for shares of its capital stock; PROVIDED, HOWEVER, that (A)(I)
Corvallis may issue the Corvallis Stock Options, (II) HealthFirst may issue
the
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HealthFirst Stock Options and (III) Medford may issue the Medford Stock
Options and (B)(I) HealthFirst may issue up to 100 Class A Shares to each of
the 12 non-shareholder providers of HealthFirst designated by HealthFirst
and (II) Medford may issue 1 share of its Common Stock to each of the two
non-shareholder providers of Medford designated by Medford;
(iv) except in the ordinary course of business and consistent with past
practice (A) acquire, dispose of, transfer, lease, license, mortgage, pledge
or encumber any assets, (B) incur, assume or prepay any material
indebtedness, liability or obligation or issue any debt securities, (C)
assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any
other person or entity, (D) make any material loan, advance or capital
contribution to, or investment in, any other person or entity or enter into
any contract, agreement, commitment or arrangement with respect to any of
the matters described in clauses (A) through (D) of this Section 5.1(b)(iv);
PROVIDED, HOWEVER, that the cumulative amount of obligations incurred under
any contract, agreement commitment or arrangement in the ordinary course of
business (y) after December 1, 1995 through the Effective Time shall not,
without the prior approval of PPI and the other Companies, exceed $1,300,000
in the case of Corvallis and (z) after January 1, 1996 through the Effective
Time shall not, without the prior approval of PPI and the other companies,
exceed $4,300,000 in the case of HealthFirst and $1,600,000 in the case of
Medford;
(v) except in the ordinary course of business and consistent with past
practice (A) adopt or amend any Employee Plan or other employee welfare
arrangement, (B) grant, or become obligated to grant, any general increase
in the compensation of its officers or employees or any increase in the
compensation payable or to become payable to any individual officer or (C)
enter into any employment or similar agreement or arrangement with any
employee; PROVIDED, HOWEVER, that the cumulative amount of compensations and
benefits received by providers employed thereby in the ordinary of course of
business (y) after December 1, 1995 through the Effective Time shall not,
without the prior approval of PPI and the other Companies, exceed
$12,500,000 in the case of Corvallis and (z) after January 1, 1996 through
the Effective Time shall not, without the prior approval of PPI and the
other companies, exceed $20,000,000 in the case of HealthFirst and
$12,500,000 in the case of Medford;
(vi) amend its Articles of Incorporation or Bylaws;
or
(viii) take any action or agree, in writing or otherwise, to take any
action which would make any representation or warranty described in Article
III hereof untrue or incorrect.
SECTION 5.2 CONDUCT OF BUSINESS BY PPI. Except as contemplated by this
Agreement, during the period from the date of this Agreement until the Effective
Time, PPI shall not, other than as contemplated by this Agreement, prior to the
Effective Time, without the prior written consent of the Companies, (a) split,
combine or reclassify, declare, pay or set aside for payment any distribution in
respect of, or directly or indirectly redeem, purchase or otherwise acquire, PPI
Shares; (b) authorize for issuance, issue, sell, pledge, dispose of or encumber,
deliver or agree or commit to issue, sell, pledge or deliver (whether through
the issuance or granting of any options, warrants, commitments, subscriptions,
rights to purchase or otherwise) PPI Shares, or any securities convertible into
or exercisable or exchangeable for PPI Shares, provided that PPI may issue
employee stock options to David Goldberg, Tim Dupell, Michael Bonazzola, M.D.,
Jerry Erstgaard, David Kobriger and Jon Ness upon the terms and conditions
contemplated by the respective employment agreements with PPI; or (c) amend its
Amended and Restated Certificate of Incorporation or Bylaws.
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ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 ACCESS TO INFORMATION; ADVICE OF CHANGES. (a) During the
period from the date of this Agreement until the Effective Time, each of the
Companies shall (i) upon reasonable notice, provide the other Companies and
their respective authorized officers, employees, accountants, counsel, financial
advisors and other representatives (including, without limitation, McDermott,
Will & Emery, Davis Wright Tremaine, Peter F. Stoloff, Esq., Brackhurst,
Hornecker, Hassen & Hogan, Arthur Andersen LLP and Symonds, Evans & Larson)
access during normal business hours to all of its properties, books, contracts,
commitments and records and promptly furnish any other information concerning
its businesses and properties as such other Company or Companies may reasonably
request and (ii) confer on a regular and frequent basis with the other
Companies, report on operational matters and promptly advise the other parties
orally and in writing of (A) any material change in the normal course of
business or in its properties and (B) any change or event having, or which,
insofar as can reasonably be foreseen, could have a Material Adverse Effect with
respect to such Company or which would cause or constitute a material breach of
any of the representations, warranties or agreements of such Company contained
herein.
(b) All information furnished by any Company to another Company pursuant
hereto shall be held in confidence by the Company receiving such information to
the extent required by, and in accordance with, the confidentiality agreement
previously entered into among Corvallis, HealthFirst and Medford.
SECTION 6.2 ACQUISITION PROPOSALS. Except as described in the
confidentiality agreement referred to in Section 6.1(b) hereof, each of the
parties hereto agrees that it shall not, and shall use its best efforts to cause
its officers, directors, employees, advisors and agents to not, initiate or
solicit, directly or indirectly, any inquiries or the making of any proposal
with respect to, or engage in negotiations concerning, provide any confidential
information or data to, or have any discussions with, any person (as such term
is defined in Section 13(d) of the Exchange Act) other than the other parties
hereto relating to any acquisition, business combination or purchase of all or
any significant portion of the assets of, or any equity interest in, such party.
Such party shall immediately notify the other parties if any such inquiries are
received, and shall provide details with respect thereto.
SECTION 6.3 JOINT PROXY STATEMENTS; REGISTRATION STATEMENT; SHAREHOLDER
APPROVALS. Each of Corvallis, HealthFirst and Medford, acting through its board
of directors, shall, as promptly as practicable, in accordance with Oregon Law
and its Articles of Incorporation and Bylaws:
(a) prepare and file with the SEC a preliminary Joint Proxy Statement
and, after consultation with the other Companies, respond to any comments of
the SEC with respect to such preliminary Joint Proxy Statement and, as soon
as practicable following the date upon which the Registration Statement
becomes effective, cause a definitive Joint Proxy Statement to be mailed to
its shareholders. Whenever any event occurs which should be described in an
amendment or a supplement to the Joint Proxy Statement under the Exchange Act
and the rules and regulations promulgated thereunder or which requires a
filing to be made with the SEC, such Company will promptly inform the other
Companies and will cooperate in filing with the SEC and mailing to its
shareholders such amendment or supplement. The Joint Proxy Statement, and all
amendments and supplements thereto, shall comply with applicable law and be
in form and substance reasonably satisfactory to each such Company.
(b) prepare and file with the SEC the Registration Statement with
respect to PPI Class A Shares to be issued in the Merger hereunder and use
all reasonable efforts to have the Registration Statement declared
effective. The Companies shall also use all reasonable efforts to obtain a
"no action" ruling from the Department of Consumer and Business Services of
the State of Oregon and take any other action required to be taken under
securities or blue sky laws of the State of Oregon and take any other action
required to be taken under securities or blue sky laws of the State of
Oregon in connection with the PC Reorganizations. Each of the Companies
shall furnish all information
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concerning such Company and its shareholders and shall take all such other
action as may be reasonably requested by the other Companies in connection
with such Registration Statement, the PC Reorganizations and the issuance of
PPI Class A Shares;
(c) promptly and duly call, give notice of, convene and hold as soon as
practicable following the date upon which the Registration Statement becomes
effective a meeting of its shareholders for the purpose of voting to approve
and adopt this Agreement and the transactions contemplated hereby (including
the applicable PC Reorganization and the Merger) and shall use all
reasonable efforts, unless the board of directors thereof reasonably
determines that such efforts would involve a breach of its fiduciary duty,
to obtain such shareholders' approval; and
(d) recommend approval and adoption of this Agreement and the
transactions contemplated hereby (including the applicable PC Reorganization
and the Merger) by the shareholders of such Company, and include in the
Joint Proxy Statement such recommendation and undertake all reasonable
actions in soliciting such approval, unless the board of directors thereof
reasonably determines that such recommendation or such actions would involve
a breach of its fiduciary duty.
SECTION 6.4 AFFILIATE AGREEMENTS. Prior to the mailing to the shareholders
of each Company of the Joint Proxy Statement, each Company shall deliver to the
other Companies a letter identifying all persons or entities which are, at the
time this Agreement and the transactions contemplated hereby (including the PC
Reorganizations and the Merger) are submitted for approval to the shareholders
of such Company, "affiliates" of such Company for purposes of Rule 145 under the
Securities Act. Each Company shall use all reasonable efforts to cause each
person and entity named in such letter to deliver to the other Companies at
least 10 days prior to the Effective Time a written "affiliates" agreement, in
customary form, restricting the disposition by such person or entity of PPI
Class A Shares to be received by such person or entity in the Merger, as
contemplated by Rule 145 under the Securities Act and as required to cause such
person or entity to be an owner of PPI Class A Shares immediately after the
Merger for purposes of Section 351 of the Code. Certificates surrendered for
exchange by any person or entity constituting an "affiliate" of a Company within
the meaning of Rule 145 under the Securities Act shall not be exchanged by PPI
for PPI Class A Shares pursuant to Section 2.8 hereof until PPI has received
such agreement described in this Section 6.4.
SECTION 6.5 DIRECTOR AND OFFICER INDEMNIFICATION. All rights to
indemnification and advancement of expenses existing in favor of the directors,
officers and agents of any party hereto (referred to herein, collectively, as
the "Indemnified Parties") under the provisions existing on the date hereof of
the Articles of Incorporation, Bylaws or indemnification agreements of such
party shall survive the Effective Time for six years thereafter (including any
directors' and officers' liability insurance theretofore maintained), and PPI
agrees to indemnify and advance expenses to the Indemnified Parties to the full
extent required or permitted by any party under the provisions existing on the
date hereof of the Articles of Incorporation, Bylaws or indemnification
agreements of such party.
SECTION 6.6 PUBLIC ANNOUNCEMENTS. So long as this Agreement is in effect,
each of the parties hereto shall consult with the other parties before issuing
any press release or otherwise making any public statement with respect to any
of the transactions contemplated hereunder (including the PC Reorganizations and
the Merger) and shall not issue any such press release or make any such public
statement prior to such consultation.
SECTION 6.7 FURTHER ACTION. Upon the terms and subject to the conditions
hereof, each of the parties hereto agrees to use all reasonable efforts to take,
or cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable to consummate the transactions contemplated by
this Agreement (including the PC Reorganizations and the Merger) and shall use
all reasonable efforts to obtain all waivers, permits, consents and approvals
and to effect all registrations, filings and notices with or to third parties or
governmental authorities which are necessary or desirable in connection with
such transactions. None of the parties hereto shall take any action that will
have the effect of delaying, impairing
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or impeding the receipt of any such approvals. Each party will keep the other
parties apprised of the status of any inquiries made of such party by the SEC or
any other governmental agency or authority or members of their respective staffs
with respect to this Agreement or such transactions.
SECTION 6.8 ACCOUNTING METHODS. Each of the parties hereto agrees that it
shall not change its (a) methods of accounting in effect at December 31, 1995,
except as required by GAAP (as concurred in by its independent auditors), or (b)
fiscal year.
SECTION 6.9 TAX TREATMENT. Each of the parties hereto agrees that it shall
not take or cause to be taken any action, whether before or after the Effective
Time, that would disqualify any of the Corvallis Distribution, the HealthFirst
Distribution and the Medford Distribution as a "reorganization" within the
meaning of Section 355 of the Code or the Merger as a "reorganization" within
the meaning of Section 368 of the Code; PROVIDED, HOWEVER, that, at the option
of Corvallis, the Corvallis Distribution may be made on a basis other than in
accordance with the fair market value of each such shareholder's then-current
equity in Corvallis so long as such distribution would not cause adverse tax or
other consequences for the other Companies or their respective shareholders with
respect to (i) the qualification of the HealthFirst Distribution or the Medford
Distribution as a "reorganization" within the meaning of Section 355 of the Code
or (ii) the qualification of the Merger as a "reorganization" within the meaning
of Section 368 of the Code.
ARTICLE VII
CONDITIONS OF CONSUMMATION OF TRANSACTIONS
SECTION 7.1 CONDITIONS TO OBLIGATION OF THE PARTIES TO EFFECT THE
MERGER. The respective obligations of the parties hereto to consummate the PC
Reorganizations and the Merger shall be subject to the fulfillment at or prior
to the Effective Time of the following conditions, unless waived by all of the
parties in writing:
(a) SHAREHOLDER APPROVAL. (i) This Agreement and the transactions
contemplated hereby (including, without limitation, the Corvallis
Reorganization and the Merger) shall have been approved and adopted by the
vote of the holders of two-thirds of the Corvallis Class A Shares and the
vote of the holders of two-thirds of the Corvallis Class B Shares, in each
case as a voting group, in accordance with Oregon Law.
(ii) This Agreement and the transactions contemplated hereby (including,
without limitation, the HealthFirst Reorganization and the Merger) shall
have been approved and adopted by the vote of the holders of a majority of
Class A Shares of HealthFirst in accordance with Oregon Law.
(iii) This Agreement and the transactions contemplated hereby
(including, without limitation, the Medford Reorganization and the Merger)
shall have been approved and adopted by the vote of the holders of a
majority of Medford Shares in accordance with Oregon Law.
(b) BLUE SKY NO ACTION RULING. The Department of Consumer and Business
Services of the State of Oregon shall have issued a "no action" ruling with
respect to (i) the distribution of shares of capital stock of Corvallis New
PC to the shareholders of Corvallis in connection with the Corvallis
Distribution, (ii) the distribution of shares of capital stock HealthFirst
New PC to the shareholders of HealthFirst in connection with the HealthFirst
Distribution and (iii) the distribution of shares of capital stock of
Medford New PC to the shareholders of Medford in connection with the Medford
Distribution.
(c) REGISTRATION STATEMENT. The SEC shall have declared the
Registration Statement effective. No stop order suspending the effectiveness
of the Registration Statement or any part thereof shall have been issued and
no proceeding for that purpose, and no similar proceeding in respect of the
Joint Proxy Statement, shall have been initiated or threatened in writing by
the SEC.
(d) NO INJUNCTION OR ORDER. No preliminary or permanent injunction or
other order by any federal, state or foreign court of competent jurisdiction
which prohibits the consummation of the
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Merger shall have been issued and remain in effect. No statute, rule,
regulation, executive order, stay, decree or judgment shall have been
enacted, issued, promulgated, enforced or entered by any court or
governmental authority which prohibits or restricts the consummation of the
Merger or other transactions contemplated hereunder. Other than the filing
of the Certificate of Merger with the Secretary of State of the State of
Delaware and the Articles of Merger with the Secretary of State of the State
of Oregon, all authorizations, consents, orders or approvals of, or
declarations or filings with, and all expirations of waiting periods imposed
by, any government authority (referred to herein, collectively, as the
"Regulatory Consents") which are necessary for the consummation of the
Merger, other than those Regulatory Consents which, if not obtained, would
have a material adverse effect on the consummation of the Merger or a
Material Adverse Effect with respect to the Surviving Corporation, shall
have been filed, occurred or been obtained and such Regulatory Consents
shall be in full force and effect. All securities or blue sky permits and
other authorizations of the State of Oregon necessary to effect the PC
Reorganizations, to issue PPI Class A Shares in exchange for Old PC Shares
and to consummate the Merger shall have been received.
(e) OPTION PLANS. PPI shall have taken all necessary action to adopt
the PPI Employee Option Plan, the PPI Non-Employee Director Option Plan, the
PPI Non-Employee Provider Option Plan and the PPI Change in Control Plan.
(f) RIGHTS AGREEMENT. PPI shall have taken all necessary action to
adopt a Rights Agreement, substantially in the form attached hereto as
Exhibit G, for a dividend distribution of one right for each PPI Common
Share to purchase a certain number of shares of a class of preferred stock
of PPI.
(g) TAX OPINION. PPI and each of the Companies shall have received the
opinion of McDermott, Will & Emery, dated on or about the date that is two
business days prior to the date the Joint Proxy Statement is first mailed to
shareholders of each of the Companies, with such assumptions and
qualifications as are reasonably satisfactory to the Companies and based on
such certificates of officers of each of the Companies as requested by
McDermott, Will & Emery, to the effect that (i) each of the Corvallis
Distribution, the HealthFirst Distribution and the Medford Distribution
will, more likely than not, be treated for federal income tax purposes as a
"reorganization" within the meaning of Section 355 of the Code and (ii) the
Merger will, more likely than not, be treated for federal income tax
purposes as a "reorganization" within the meaning of Section 368 of the
Code, except that no such opinion shall be provided to Corvallis in the
event that the Corvallis Distribution is effected in a manner that adversely
affects (i) the qualification thereof as a "reorganization" within the
meaning of Section 355 of the Code or (ii) the qualification of the Merger
as a "reorganization" within the meaning of Section 368 of the Code.
(h) APPROVALS; PROVIDER NUMBERS. Each of Corvallis New PC, HealthFirst
New PC and Medford New PC shall have obtained all material approvals,
licenses and provider numbers from governmental authorities, in form and
substance reasonably satisfactory to the Companies, necessary or appropriate
for the operation following the Effective Time of the respective businesses
of Corvallis, HealthFirst and Medford as currently operated thereby,
including the receipt of confirmation from all applicable governmental
agencies that at the Effective Time all licenses required by law to operate
such businesses as currently operated will be transferred to, or reissued in
the name of, Corvallis New PC, HealthFirst New PC and Medford New PC, as the
case may be. Further, each of Corvallis New PC, HealthFirst New PC and
Medford New PC shall have received all material approvals, consents or
commitments satisfactory to the Companies from Medicare and other
third-party payors of certification effective as of the Effective Time for
the continued participation by Corvallis New PC, HealthFirst New PC and
Medford New PC in each such program and the right of Corvallis New PC,
HealthFirst New PC and Medford New PC to receive reimbursement with respect
thereto.
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SECTION 7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PPI. The obligation of
PPI to consummate the Merger is subject to the following conditions, in addition
to the conditions described in Section 7.1 hereof, unless waived in writing by
PPI:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of each of Corvallis, HealthFirst and Medford (other than such
representations and warranties as are made as of a specific date) contained
in Article III of this Agreement shall be true and correct in all material
respects at and as of the Effective Time, with the same force and effect as
if made at and as of the Effective Time and PPI shall have received a
certificate of the chairman of the board or the president of each of the
Companies as to the satisfaction of this condition.
(b) AGREEMENTS AND COVENANTS. Each of Corvallis, HealthFirst and
Medford shall have performed or complied in all material respects with all
agreements and covenants required by this Agreement to be performed or
complied with thereby at or prior to the Effective Time.
(c) CONSENT AND APPROVALS. Each of Corvallis, HealthFirst and Medford
shall have obtained the consent or approval of each person or entity the
consent or approval of which shall be required in connection with the
transactions contemplated hereby under any loan or credit agreement, note,
mortgage, indenture, lease, license or other agreement or instrument, except
for such consents and approvals the failure of which to obtain would not,
individually or in the aggregate, have a Material Adverse Effect with
respect to such Company or upon the consummation of the transactions
contemplated hereunder.
(d) PC REORGANIZATIONS. The respective Restated Articles of
Incorporation of Corvallis, HealthFirst and Medford shall have been made
effective and the PC Reorganizations shall have been consummated in
accordance with Oregon Law.
(e) MANAGEMENT AGREEMENTS. (i) Corvallis shall have entered into the
Corvallis Management Agreement with Corvallis New PC, (ii) HealthFirst shall
have entered into the HealthFirst Management Agreement with HealthFirst New
PC and (iii) Medford shall have entered into the Medford Management
Agreement with Medford New PC.
SECTION 7.3 ADDITIONAL CONDITIONS TO OBLIGATION OF CORVALLIS. The
obligation of Corvallis to consummate the Merger is subject to the following
conditions, in addition to the conditions described in Section 7.1 hereof,
unless waived in writing by Corvallis:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of each of the other parties hereto (other than such representations and
warranties as are made as of a specific date) contained in Articles III and
IV of this Agreement shall be true and correct in all material respects at
and as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time and Corvallis shall have received a certificate
of the chairman of the board or the president of each of the other parties
hereto as to the satisfaction of this condition.
(b) AGREEMENTS AND COVENANTS. Each of the other parties hereto shall
have performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with
thereby at or prior to the Effective Time.
(c) CONSENT AND APPROVALS. Each of the other parties hereto shall have
obtained the consent or approval of each person or entity the consent or
approval of which shall be required in connection with the transactions
contemplated hereby under any loan or credit agreement, note, mortgage,
indenture, lease, license or other agreement or instrument, except for such
consents and approvals the failure of which to obtain would not,
individually or in the aggregate, have a Material Adverse Effect with
respect to such party or upon the consummation of the transactions
contemplated hereunder.
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(d) PC REORGANIZATIONS. The respective Restated Articles of
Incorporation of HealthFirst and Medford shall have been made effective and
the HealthFirst Reorganization and the Medford Reorganization shall have
been consummated in accordance with Oregon Law.
(e) MANAGEMENT AGREEMENTS. HealthFirst shall have entered into the
HealthFirst Management Agreement with HealthFirst New PC and (ii) Medford
shall have entered into the Medford Management Agreement with Medford New
PC.
(f) DISSENTING SHAREHOLDERS. Unless waived in writing by Corvallis,
(a) the aggregate number of shares held by shareholders of HealthFirst
dissenting from the Merger and demanding fair value of such shares in
accordance with the provisions of Section 60.554 of the Oregon Business
Corporation Act shall not exceed 15 percent all issued and outstanding
shares of capital stock of HealthFirst and (b) the aggregate number of
shares held by shareholders of Medford dissenting from the Merger and
demanding fair value of such shares in accordance with the provisions of
Section 60.554 of the Oregon Business Corporation Act shall not exceed 15
percent all issued and outstanding shares of capital stock of Medford.
SECTION 7.4 ADDITIONAL CONDITIONS TO OBLIGATION OF HEALTHFIRST. The
obligation of HealthFirst to consummate the Merger is subject to the following
conditions, in addition to the conditions described in Section 7.1 hereof,
unless waived in writing by HealthFirst:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of each of the other parties hereto (other than such representations and
warranties as are made as of a specific date) contained in Articles III and
IV of this Agreement shall be true and correct in all material respects at
and as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time and HealthFirst shall have received a
certificate of the chairman of the board or the president of each of the
other parties hereto as to the satisfaction of this condition.
(b) AGREEMENTS AND COVENANTS. Each of the other parties hereto shall
have performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with
thereby at or prior to the Effective Time.
(c) CONSENT AND APPROVALS. Each of the other parties hereto shall have
obtained the consent or approval of each person or entity the consent or
approval of which shall be required in connection with the transactions
contemplated hereby under any loan or credit agreement, note, mortgage,
indenture, lease, license or other agreement or instrument, except for such
consents and approvals the failure of which to obtain would not,
individually or in the aggregate, have a Material Adverse Effect with
respect to such Company or upon the consummation of the transactions
contemplated hereunder.
(d) PC REORGANIZATIONS. The respective Restated Articles of
Incorporation of Corvallis and Medford shall have been made effective and
the Corvallis Reorganization and the Medford Reorganization shall have been
consummated in accordance with Oregon Law.
(e) MANAGEMENT AGREEMENTS. (i) Corvallis shall have entered into the
Corvallis Management Agreement with Corvallis New PC and (ii) Medford shall
have entered into the Medford Management Agreement with Medford New PC.
(f) DISSENTING SHAREHOLDERS. Unless waived in writing by HealthFirst,
(a) the aggregate number of shares held by shareholders of Corvallis
dissenting from the Merger and demanding fair value of such shares in
accordance with the provisions of Section 60.554 of the Oregon Business
Corporation Act shall not exceed 15 percent all issued and outstanding
shares of capital stock of Corvallis and (b) the aggregate number of shares
held by shareholders of Medford dissenting from the Merger and demanding
fair value of such shares in accordance with the provisions of Section
60.554 of the Oregon Business Corporation Act shall not exceed 15 percent
all issued and outstanding shares of capital stock of Medford.
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SECTION 7.5 ADDITIONAL CONDITIONS TO OBLIGATION OF MEDFORD. The obligation
of Medford to consummate the Merger is subject to the following conditions, in
addition to the conditions described in Section 7.1 hereof, unless waived in
writing by Medford:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of each of the other parties hereto (other than such representations and
warranties as are made as of a specific date) contained in Articles III and
IV of this Agreement shall be true and correct in all material respects at
and as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time and Medford shall have received a certificate
of the chairman of the board or the president of each of the other parties
hereto as to the satisfaction of this condition.
(b) AGREEMENTS AND COVENANTS. Each of the other parties hereto shall
have performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with
thereby at or prior to the Effective Time.
(c) CONSENT AND APPROVALS. Each of the other parties hereto shall have
obtained the consent or approval of each person or entity the consent or
approval of which shall be required in connection with the transactions
contemplated hereby under any loan or credit agreement, note, mortgage,
indenture, lease, license or other agreement or instrument, except for such
consents and approvals the failure of which to obtain would not,
individually or in the aggregate, have a Material Adverse Effect with
respect to such party or upon the consummation of the transactions
contemplated hereunder.
(d) PC REORGANIZATIONS. The respective Restated Articles of
Incorporation of Corvallis and HealthFirst shall have been made effective
and the Corvallis Conversion and the HealthFirst Conversion shall have been
consummated in accordance with Oregon Law.
(e) MANAGEMENT AGREEMENTS. (i) Corvallis shall have entered into the
Corvallis Management Agreement with Corvallis New PC and (ii) HealthFirst
shall have entered into the HealthFirst Management Agreement with
HealthFirst New PC.
(f) DISSENTING SHAREHOLDERS. Unless waived in writing by Medford, (a)
the aggregate number of shares held by shareholders of Corvallis dissenting
from the Merger and demanding fair value of such shares in accordance with
the provisions of Section 60.554 of the Oregon Business Corporation Act
shall not exceed 15 percent all issued and outstanding shares of capital
stock of Corvallis and (b) the aggregate number of shares held by
shareholders of HealthFirst dissenting from the Merger and demanding fair
value of such shares in accordance with the provisions of Section 60.554 of
the Oregon Business Corporation Act shall not exceed 15 percent all issued
and outstanding shares of capital stock of HealthFirst.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 TERMINATION. This Agreement may be terminated and the
transactions contemplated hereby (including, without limitation, the PC
Reorganizations and the Merger) abandoned at any time prior to the Effective
Time, whether before or after approval by the shareholders of any of the
Companies:
(a) by mutual written consent of all of the parties hereto;
(b) by any party (referred to herein as the "Notice Party") if there
shall have been any material breach of a material obligation of any other
party (referred to herein as the "Breaching Party") hereunder and, if such
breach is curable, such default shall have not been remedied within 10 days
after receipt by the Breaching Party of notice in writing from the Notice
Party specifying such breach and requesting that such breach be remedied;
PROVIDED, HOWEVER, that such 10-day period shall be extended for so long as
the Breaching Party shall be making diligent attempts to cure such default
and such default remains curable;
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(c) by any party (referred to herein as the "Withdrawing Party") if the
board of directors of such party shall have (i) determined, in the exercise
of its fiduciary duties under applicable law, not to recommend this
Agreement, the applicable PC Reorganization or the Merger or shall have
withdrawn such recommendation or (ii) resolved to do any of the foregoing;
(d) by any party if any court of competent jurisdiction in the United
States or any governmental authority shall have issued an order, decree or
ruling or taken any other action restraining, enjoining or otherwise
prohibiting any PC Reorganization or the Merger and such order, decree,
ruling or other action shall have become final and non-appealable;
(e) by any party upon written notice to the other parties if any
approval of the shareholders of such party required for the consummation of
the transactions submitted for their approval shall not have been obtained
by reason of the failure to obtain the required vote at a duly held meeting
of shareholders at any adjournment thereof; or
(f) by any party if the Effective Time shall not have taken place on or
before January 31, 1997 (which date may be extended by agreement of the
parties hereto), unless the party desiring to so terminate pursuant to this
Section 8.1(f) is in default hereunder.
SECTION 8.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement in accordance with Section 8.1 hereof, written notice of such
termination shall forthwith be provided by the party so terminating this
Agreement to the other parties hereto and this Agreement shall become void and
have no effect, and the transactions contemplated hereunder shall be abandoned
without further action by any of the parties hereto, without any liability or
obligation on the part of any party, other than as set forth in this Section 8.2
and Section 9.2 hereof and except to the extent that such termination results
from a breach of this Agreement. If this Agreement is terminated as provided
herein, each party hereto shall, upon request therefor by any other party
hereto, shall destroy all documents, workpapers and other materials of such
other party hereto relating to the transactions contemplated hereunder, whether
obtained before or after the execution hereof.
SECTION 8.3 AMENDMENT. This Agreement may be amended by action taken at
any time before or after approval hereof by the shareholders of the parties
hereto, but, after any such approval, no amendment shall be made which alters
any of the Exchange Ratios or which in any way materially adversely affects the
rights of such shareholders, without the further approval of such shareholders.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each party.
SECTION 8.4 WAIVER. At any time prior to the Effective Time, the parties
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties of the other parties hereto contained herein or
in any document delivered by such other parties hereto pursuant hereto and (c)
waive compliance with any of the agreements or conditions of the other parties
hereto contained herein. Such extension or waiver (i) shall be valid if set
forth in an instrument in writing granting such waiver signed by each party and
(ii) shall not operate as a waiver of, or estoppel with respect, any subsequent
or other failure.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. No
representations, warranties or agreements contained herein shall survive beyond
the Effective Time except that the agreements contained in Sections 2.5, 2.6,
2.7, 2.8, 2.9, 2.10, 6.5, 6.6, 6.7, 6.10, 9.1, 9.4, 9.6, 9.7 and 9.8 hereof, and
all other agreements of PPI, shall survive beyond the Effective Time.
SECTION 9.2 EXPENSES AND BREAKUP FEE. (a) All costs and expenses incurred
in connection with this Agreement and the transactions contemplated hereunder
(including, without limitation, the PC
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Reorganizations and the Merger) shall be paid by the parties hereto in
accordance with the Amended and Restated Expense Sharing Agreement, dated as of
September 19, 1996, entered into among the parties.
(b) Notwithstanding the provisions of paragraph (a) of this Section 9.2, if
this Agreement is terminated by the Breaching Party under Sections 8.1(b) or the
Withdrawing Party under 8.1(c) hereof, then, in such event, such Breaching Party
or such Withdrawing Party, as the case may be, shall forthwith pay, within five
days of the date of the termination of this Agreement, to each of the other
parties hereto a breakup fee in an amount equal to all costs and expenses
incurred by such party, including, without limitation, all fees and expenses of
counsel, accountants, investment bankers, experts and consultants incurred by
each such party or on its behalf in connection with or related to the
authorization, preparation, negotiation, execution and performance of this
Agreement, the preparation, filing, printing and mailing the Joint Proxy
Statement and the Registration Statement, the solicitation of shareholders'
approvals and all other matters related to the consummation of the transactions
contemplated hereby (including, without limitation, the PC Reorganizations and
the Merger).
SECTION 9.3 NOTICES. All notices and other communications to be provided
pursuant hereto shall be in writing and shall be deemed to have been duly
provided as of the date delivered if sent by telecopier or delivered personally
(including, without limitation, delivery by commercial carrier warranting
next-day delivery) or as of the third day after mailing if mailed by registered
or certified mail (postage prepaid, return receipt requested) to each party at
such party's address set forth herein (or at such other address for a party as
shall be specified by similar notice):
(a) if to PPI:
Physician Partners, Inc.
111 SW Columbia Street, Suite 725
Portland, Oregon 97201
Attention: President
with a copy to:
McDermott, Will & Emery
2049 Century Park East--Suite 3400
Los Angeles, California 90067
Attention: Douglas M. Mancino, Esq.
Telecopier No.: (310) 277-4730
(b) if to Corvallis:
The Corvallis Clinic, P.C.
444 NW Elks Drive
Corvallis, Oregon 97330
Attention: David Kobriger
Telecopier No.: (541) 757-1847
(c) if to HealthFirst:
HealthFirst Medical Group, P.C.
10535 N.E. Glisan
Portland, Oregon 97220
Attention: Jerry Erstgaard
Telecopier No.: (503) 256-6825
(d) if to Medford:
Medford Clinic, P.C.
555 Black Oak Drive
Medford, Oregon 97504
Attention: Jon Ness
Telecopier No.: (541) 734-3598
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<PAGE>
SECTION 9.4 HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 9.5 SEVERABILITY. If any term or provision of this Agreement, or
the application thereof to any person or entity or property or circumstance,
shall to any extent be, or be deemed to be, invalid or unenforceable, the
remainder of this Agreement, or the application of such term or provision to
persons or entities or property or circumstances other than those as to which
such term or provision is, or is deemed to be, invalid or unenforceable, shall
not be affected thereby, and each term and provision of this Agreement shall be
valid and enforced to the fullest extent permitted by law.
SECTION 9.6 ENTIRE AGREEMENT. This Agreement (including the Schedules and
Exhibits and other documents and instruments referred to herein) and the
confidentiality agreement referenced in Section 6.1(b) hereof (a) constitute the
entire agreement, and supersedes all prior agreements and undertakings, both
written and oral, among the parties hereto or any of such parties hereto, with
respect to the subject matter hereof, (b) are not intended to confer upon any
other person or entity any rights or remedies hereunder. In this regard, each of
Corvallis, HealthFirst and Medford represents and warrants that such party has
no arrangement or understanding with an entity not a party to this Agreement
with respect to a merger or similar transaction in the event this Agreement is
terminated.
SECTION 9.7 ASSIGNMENT. Neither this Agreement nor any of the rights set
forth herein shall be assigned by any of the parties hereto (by operation of law
or otherwise) without the prior written consent of the other parties hereto.
SECTION 9.8 GOVERNING LAW. (a) This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Oregon.
(b) Each party hereby irrevocably submits to the jurisdiction of any Oregon
state court or United States federal court sitting in the State of Oregon over
any suit, action or other proceeding arising out of or relating to this
Agreement and hereby irrevocably agrees that all claims with respect to any such
suit, action or proceeding may be heard and determined in such courts.
SECTION 9.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which when executed shall be deemed to be an original and
all of which taken together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first written above by such party's officer thereunto
duly authorized.
PHYSICIAN PARTNERS, INC.
By: /s/ DAVID M. GOLDBERG
-----------------------------------------
Title: PRESIDENT
THE CORVALLIS CLINIC, P.C.
By: /s/ DAVID H. CUTSFORTH, JR., M.D.
-----------------------------------------
Title:
HEALTHFIRST MEDICAL GROUP, P.C
By: /s/ MATTHEW M. SHELLEY, M.D.
-----------------------------------------
Title: PRESIDENT
MEDFORD CLINIC, P.C.
By: /s/ BRUCE E. VAN ZEE, M.D.
-----------------------------------------
Title: PRESIDENT
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<PAGE>
AMENDMENT TO
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This Amendment, dated as of November 4, 1996, is entered into by and among
PHYSICIAN PARTNERS, INC., a newly-formed Delaware corporation ("PPI"), THE
CORVALLIS CLINIC, P.C., an Oregon professional corporation ("Corvallis"),
HEALTHFIRST MEDICAL GROUP, P.C., an Oregon professional corporation
("HealthFirst"), and MEDFORD CLINIC, P.C., an Oregon professional corporation
("Medford" and, together with Corvallis and HealthFirst, referred to herein,
collectively, as the "Companies").
RECITALS
WHEREAS, PPI, Corvallis, HealthFirst and Medford have entered into the
Amended and Restated Agreement and Plan of Reorganization and Merger, dated as
of September 19, 1996 (the "Reorganization and Merger Agreement"; terms defined
in the Reorganization and Merger Agreement and not otherwise defined herein have
the same respective meanings when used herein, and the rules of construction set
forth in the Reorganization and Merger Agreement are incorporated herein by
reference), to effect the PC Reorganizations and the Merger;
WHEREAS, PPI and the Companies wish to amend the Reorganization and Merger
Agreement upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
SECTION 1. AMENDMENTS TO REORGANIZATION AND MERGER AGREEMENT. The
Reorganization and Merger Agreement is, effective as of the date hereof, hereby
amended as follows:
(a) Section 5.1(b)(ii) of the Reorganization and Merger Agreement is hereby
amended to read in full as follows:
"(ii) declare, pay or set aside for payment any distribution in respect
of shares of its capital stock; PROVIDED, HOWEVER, that in the event that
the quotient obtained by dividing (A) the Corvallis FTE, the HealthFirst FTE
or the Medford FTE as of June 1, 1996 into (B) the excess of total assets
over total liabilities of Corvallis, HealthFirst or Medford, as applicable
(such Company's "FTE Net Shareholder Equity"), as reflected on the balance
sheet thereof as at June 30, 1996, reviewed by Arthur Andersen LLP and
delivered to the Companies no later than November 15, 1996 (or, if available
on the date the Joint Proxy Statement is first mailed to shareholders of
each of the Companies, as reflected on the balance sheet thereof as at
September 30, 1996, reviewed by Arthur Andersen LLP and delivered to the
Companies no later than December 1, 1996), which reviewed balance sheet
shall be adjusted (except in the case of HealthFirst) by changing the value
of any real estate specified thereon from book value to fair market value
based on fair market value appraisals prepared by appraisers reasonably
acceptable to the other Companies during the past 20-month period, exceeds
the FTE Net Shareholder Equity of any other Company by more than 20 percent
(the "Minimum Net Equity Threshold"), such Company may make a distribution
to its shareholders in an amount equal to the product of (y) the amount of
such excess of such Company's FTE Net Shareholder Equity over the Minimum
Net Equity Threshold multiplied by (z) such Company's FTE as of June 1,
1996. Such reviewed balance sheets and such fair market appraisals shall,
absent manifest error, be conclusive and binding for purposes of determining
each Company's FTE Net Shareholder Equity;"
(b) Section 7.1(g) of the Reorganization and Merger Agreement is hereby
amended to read in full as follows:
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"(g) TAX OPINION. PPI and each of the Companies shall have received the
opinion of McDermott, Will & Emery, dated on or about the date that is two
business days prior to the date the Joint Proxy Statement is first mailed to
shareholders of each of the Companies, with such assumptions and qualifications
as are reasonably satisfactory to the Companies and based on such certificates
of officers of each of the Companies as requested by McDermott, Will & Emery, to
the effect that the Merger will, more likely than not, be treated for federal
income tax purposes as a 'reorganization' within the meaning of Section 368 of
the Code."
SECTION 2. REFERENCE TO AND EFFECT ON THE REORGANIZATION AND MERGER
AGREEMENT. On and after the date hereof, each reference in the Reorganization
and Merger Agreement to "this Agreement," "hereunder," "hereof," "herein" or
words of like import, and each reference in the other agreements, documents and
instruments relating to the Reorganization and Merger Agreement (the
"Transaction Documents") to the Reorganization and Merger Agreement, shall mean
and be a reference to the Reorganization and Merger Agreement as amended hereby.
Except as hereby expressly amended, the Reorganization and Merger Agreement
shall remain in full force and effect, and is hereby ratified and confirmed in
all respects on and as of the date hereof.
SECTION 3. EXECUTION IN COUNTERPARTS. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute one and the same
instrument.
SECTION 4. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF OREGON.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
their duly authorized representatives.
PHYSICIAN PARTNERS, INC.
By: /s/ DAVID M. GOLDBERG
--------------------------------------
Title: President
THE CORVALLIS CLINIC, P.C.
By: /s/ DAVID H. CUTSFORTH, JR. M.D.
--------------------------------------
Title: President
HEALTHFIRST MEDICAL GROUP, P.C.
By: /s/ MATTHEW M. SHELLEY, M.D.
--------------------------------------
Title: President
MEDFORD CLINIC, P.C.
By: /s/ BRUCE VAN ZEE, M.D.
--------------------------------------
Title: President
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<PAGE>
APPENDIX B
1996 STOCK OPTION PLAN
FOR EMPLOYEES OF
PHYSICIAN PARTNERS, INC.
1. PURPOSE OF THE PLAN
The 1996 Stock Option Plan for Employees of Physician Partners, Inc. (the
"Plan") was established by Physician Partners, Inc. (the "Company"), effective
December 31, 1996 to:
1.1 furnish incentives to eligible employees chosen to receive options
because they are considered capable of responding by improving operations and
increasing profits;
1.2 encourage selected employees to accept or continue employment with the
Company or its Affiliates; and
1.3 increase the interest of selected employees and officers in the
Company's welfare through their participation in the growth in value of Class A
Common Stock, $.01 par value, of the Company ("Class A Common Stock").
To accomplish the foregoing objectives, this Plan provides a means whereby
employees may receive options to purchase Class A Common Stock. Options granted
under this Plan ("Options") will be either nonqualified options ("NQOs") subject
to federal income taxation upon exercise or Options intended to be incentive
stock options ("ISOs") not subject to immediate federal income taxation upon
exercise.
2. ELIGIBLE PERSONS
2.1 GENERAL. Every person who at the date on which an Option granted to
the person becomes effective (the "Grant Date") and who is an employee or
officer of the Company or of any Affiliate.
2.2 DEFINITION OF AFFILIATE. The term "Affiliate," as used in this Plan,
means a "parent corporation" or "subsidiary corporation," as defined in Section
424 of the Internal Revenue Code of 1986 (the "Code"). The term "employee" shall
have the meaning ascribed for purposes of Section 3401(c) of the Code and the
Treasury Regulations promulgated thereunder and shall include an officer who is
also an employee.
3. STOCK SUBJECT TO THIS PLAN
The total number of shares of stock reserved for issuance upon the exercise
of Options is 900,000 shares of Class A Common Stock. The shares covered by the
portion of any grant that expires unexercised under this Plan shall become
available again for grants under this Plan. The number of shares reserved for
issuance under this Plan is subject to adjustment in accordance with the
provisions for adjustment in this Plan.
4. ADMINISTRATION
This Plan shall be administered by a committee (the "Committee") of not less
than three (3) members appointed by the Board of Directors of the Company. The
Committee may delegate nondiscretionary administrative duties to other employees
of the Company as it deems proper. Subject to the approval of the Board of
Directors and the provisions of this Plan, the Committee shall have the
authority to select the persons to receive Options under this Plan, to fix the
number of shares that each optionee may purchase, to set the terms and
conditions of each Option and to determine all other matters relating to this
Plan. Any act approved in writing by a majority of the members of the Committee
shall be a valid act of the Committee. Such determinations shall be final and
binding on all persons. No member of the Board of Directors or the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any option granted under the Plan.
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5. GRANTING OF THE RIGHTS
5.1 TEN YEAR LIMITATION. No Options shall be granted under this Plan after
ten years from the date the Board of Directors of the Company adopts this Plan.
5.2 WRITTEN AGREEMENT; EFFECT. Each Option shall be evidenced by a written
agreement (the "Option Agreement"), in a form satisfactory to the Committee,
executed by the Company and by the person to whom such Option is granted. The
Option Agreement shall specify whether each Option it evidences is a NQO or an
ISO. Failure of the grantee to execute an Option Agreement shall not void or
invalidate the grant of any Option; the Option may not be exercised, however,
until the Option Agreement is executed. Each optionee who is or is expected to
become an employee shall contemporaneously with the grant of an option execute
an Employee Noncompetition, Nondisclosure and Developments Agreement in a form
satisfactory to the Committee.
5.3 ANNUAL $100,000 LIMITATION ON ISOS. To the extent required by Section
422(d) of the Code, the aggregate fair market value of the shares of the Class A
Common Stock with respect to which ISOs are exercisable for the first time by
any individual during any calendar year shall not exceed $100,000. For this
purpose, fair market value shall be the fair market value of the shares covered
by the ISOs when the ISOs were granted. If by their terms, such ISOs taken
together would first become exercisable at a faster rate, this $100,000
limitation shall be applied by deferring the exercisability of those ISOs or
portions of ISOs which have the highest per share exercise prices. The ISOs or
portions of ISOs, the exercisability of which is so deferred, shall become
exercisable on the first day of the first subsequent calendar year during which
they may be exercised, as determined by applying these same principles of this
Section and all other provisions of this Section and all other provisions of
this Plan, including those relating to the expiration and termination of ISOs.
5.4 ADVANCE APPROVALS. The Board of Directors may approve the grant of
Options to persons who are expected to become employees of the Company, but are
not employees at the date of approval. In such cases, the Option shall be deemed
granted, without further approval, on the date the grantee becomes an employee
and must satisfy all requirements of this Plan for Options granted on that date.
6. TERMS AND CONDITIONS OF OPTIONS
Each Option shall be designated as an ISO or a NQO and shall be subject to
the terms and conditions set forth in Section 6.1 NQOs shall also be subject to
the terms and conditions set forth in Section 6.2, but not those set forth in
Section 6.3. ISOs shall also be subject to the terms and conditions set forth in
Section 6.3, but not those set forth in Section 6.2.
6.1 TERMS AND CONDITIONS TO WHICH ALL OPTIONS ARE SUBJECT. All Options
shall be subject to the following terms and conditions:
(a) CHANGES IN CAPITAL STRUCTURE. Subject to Section 6.1(b), if the
stock of the Company is changed by reason of a stock split, reverse stock
split, stock dividend, or recapitalization, or converted into or exchanged
for other securities as a result of a merger, consolidation, or
reorganization, appropriate adjustments shall be made in (A) the number and
class of shares of stock subject to this Plan and each outstanding Option,
and (B) the exercise price of each outstanding Option; provided, however,
that the Company shall not be required to issue fractional shares as a
result of any such adjustment. Each such adjustment shall be determined by
the Committee in its sole discretion, which determination shall be final and
binding on all persons.
(b) CORPORATE TRANSACTIONS. New options rights may be substituted for
Options granted, or the Company's obligations as to outstanding Options may
be assumed, by an employer corporation other than the Company, or an
Affiliate thereof, in connection with any merger, consolidation,
acquisition, separation, reorganization, dissolution, liquidation, sale or
like occurrence in which the Company is involved and which the Committee
determines, in its absolute discretion, would materially alter the
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structure. Substitution shall be done in such manner that the then
outstanding Options which are ISOs will continue to be "incentive stock
options" within the meaning of Section 422 of the Code to the full extent
permitted thereby. Notwithstanding the foregoing or the provisions of
Section 6.1(a), if such an event occurs and if such employer corporation, or
an Affiliate thereof, does not substitute new option rights for, and
substantially equivalent to, the outstanding Options granted hereunder, or
assume the outstanding Options granted hereunder, or if there is no employer
corporation, or if the Committee determines, in its sole discretion, that
outstanding Options should not then continue to be outstanding, the
Committee may upon ten days prior written notice to optionees in its
absolute discretion (A) shorten the period during which Options are
exercisable (provided they remain exercisable, to the extent otherwise
exercisable, for at least ten days after the date the notice is given), or
(B) cancel Options upon payment to the optionee in cash, with respect to
each Option to the extent then exercisable, of an amount which, in the
absolute discretion of the Committee, is determined to be equivalent to any
excess of the fair market value (at the effective time of the dissolution,
liquidation, merger, consolidation, acquisition, separation, reorganization,
sale or other event) of the consideration that the optionee would have
received if the Option had been exercised before the effective time, over
the exercise price of the Option; provided, however, if there is a successor
corporation and replacement options are not granted by the successor
corporation, all outstanding Options shall become exercisable prior to the
consummation of the transaction such that the optionees shall have not less
than ten days to exercise the Options and become stockholders of record
entitled to receive the consideration paid to the other stockholders of the
Company. If an optionee fails to exercise his option within any exercise
period described in this paragraph and the dissolution, liquidation, merger,
consolidation, sale or other event is consummated, his option shall no
longer be exercisable. Any unexercised option shall be cancelled and
terminated. Notwithstanding anything herein to the contrary, nothing shall
extend an optionee's right to exercise (1) an ISO after the expiration of
ten (10) years from the date it is granted or (2) a NQO after the expiration
of ten (10) years from the date it is granted. The actions described in this
Section may be taken without regard to any resulting tax consequences to the
optionee.
(c) OPTION GRANT DATE. Each Option Agreement shall specify the date as
of which it shall be effective, which date shall be the Grant Date
(determined pursuant to Section 5.4 in the case of advance approvals).
(d) FAIR MARKET VALUE. For purposes of this Plan, the fair market
value of the Company's Class A Common Stock shall be determined as follows:
(1) if the stock is listed on any established stock exchange or a
national market system, including without limitation the National Market
System of the National Association of Securities Dealers Automated
Quotation System, its fair market value shall be the closing sales price
for the stock, or the mean between the high bid and low asked prices if
no sales were reported, as quoted on such system or exchange (or the
largest such exchange) for the date the value is to be determined (or if
there are no sales or bids for such date, then for the last preceding
business day on which there were sales or bids), as reported in the Wall
Street Journal or similar publication;
(2) if the stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its fair market value shall
be the mean between the high bid and low asking prices for the stock on
the date the value is to be determined (or if there are no quoted prices
for the date of grant, then for the last preceding business day on which
there were quoted prices);
(3) in the absence of an established market for the stock, the fair
market value shall be determined in "good faith" by the Committee, with
reference to the Company's net worth, prospective earning power,
dividend-paying capacity, and other relevant factors, including sales for
the most recent 12 month period, the goodwill of the Company, the
economic outlook in the
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Company's industry, the Company's position in the industry and its
management and the values of stock of other corporations in the same or a
similar line of business.
(e) TIME OF OPTION EXERCISE. The Company shall not grant any Options
which may become exercisable at a rate in excess of 20% per annum from the
date of such grant without the written consent of a majority of the members
of the Committee.
(f) NONASSIGNABILITY OF OPTION RIGHTS. No Option shall be assignable
or otherwise transferable by the optionee except by will or by the laws of
descent and distribution. During the life of the optionee, an Option shall
be exercisable only by the optionee or the optionee's guardian or legal
representative.
(g) PAYMENT. Except as provided below, payment in full, in cash, shall
be made for all stock purchased at the time written notice of exercise of an
Option is given to the Company, and proceeds of any payment shall constitute
general funds of the Company. At the time an Option is granted or before it
is exercised, the Committee, in the exercise of its absolute discretion, may
authorize any one or more of the following additional methods of payment:
(1) acceptance of the optionee's full recourse promissory note for
some or all of the aggregate exercise price of the shares being acquired
(except for the aggregate par value of the shares being acquired, which
must be paid in cash or other lawful consideration under applicable law),
payable on such terms and bearing such interest rate as determined by the
Committee, and secured in such manner as the Committee shall approve;
including, without limitation, by a security interest in Class A Common
Stock or other securities of the Company;
(2) delivery by the optionee of Class A Common Stock or other
securities of the Company already owned by the optionee for all or part
of the aggregate exercise price of the shares being acquired, provided
the fair market value of such Class A Common Stock or securities is equal
on the date of exercise to the aggregate exercise price of the shares
being acquired, or such portion thereof as the optionee is authorized to
pay by delivery of such Class A Common Stock or securities; and
(3) any other property, so long as such property is acceptable to the
Committee and constitutes valid consideration under applicable law for
the shares being acquired and is surrendered in good form for transfer.
(h) TERMINATION.
(1) Any Option or portion thereof which has not expired or been
exercised on or before the date on which an optionee ceases to be an
employee or officer ("Termination") for cause, shall expire upon
Termination.
(2) Any Option or portion thereof which has not expired or been
exercised on or before the date of Termination without cause, shall
expire ninety (90) days after the date of Termination or a break in
continuous employment.
(3) Notwithstanding the foregoing, if Termination is due to the
permanent disability or death of the optionee, the optionee, the
optionee's personal representative or any other person who acquires
option rights from the optionee by will or the applicable laws of descent
and distribution, may, within twelve months after the date of
Termination, exercise such option rights to the extent they were
exercisable on the date of Termination.
(i) OTHER PROVISIONS. Each Option Agreement may contain such other
terms, provisions, and conditions not inconsistent with this Plan, including
rights of repurchase, as may be determined by the Committee, and each ISO
granted under this Plan shall include such provisions and conditions as are
necessary to qualify such option as an "incentive stock option" within the
meaning of Section 422 of the Code.
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(j) WITHHOLDING AND EMPLOYMENT TAXES. At the time of exercise of an
Option, the optionee shall remit to the Company in cash all applicable
federal and state withholding and employment taxes. If and to the extent
authorized and approved by the Committee in its sole discretion, an optionee
may elect, by means of a form of election to be prescribed by the Committee,
to have shares which are acquired upon exercise of an Option withheld by the
Company or tender other shares of Class A Common Stock or other securities
of the Company owned by the optionee to the Company at the time the amount
of such taxes is determined in order to pay the amount of such tax
obligations. Any Class A Common Stock or other securities so withheld or
tendered will be valued by the Company as of the date they are withheld or
tendered. Unless the Committee otherwise determines, the optionee shall pay
to the Company in cash, promptly when the amount of such obligation becomes
determinable, all applicable federal and state withholding taxes resulting
from the lapse of restrictions imposed on exercise of any Option, for a
transfer or other disposition of shares acquired upon exercise of an Option
or otherwise related to the Option or the shares acquired upon exercise of
the Option.
6.2 TERMS AND CONDITIONS TO WHICH ONLY NQOS ARE SUBJECT. Options granted
under this Plan which are designated as NQOs shall be subject to the following
terms and conditions:
(a) EXERCISE PRICE. The exercise price of an NQO shall not be less
than 85 percent of the fair market value of the stock subject to the Option
on the Grant Date; provided, however, that the exercise price of an NQO
granted to any person who owns, directly or indirectly (or is treated as
owning by reason of attribution rules, currently set forth in Code Section
424), stock of the Company constituting more than ten percent of the total
combined voting power of all classes of outstanding stock of the Company or
of any Affiliate of the Company, shall in no event be less than 100 percent
of such fair market value.
(b) OPTION TERM. Unless an earlier expiration date is specified by the
Committee at the Grant Date in the Option Agreement, each NQO shall expire
ten years from its Grant Date.
6.3 TERMS AND CONDITIONS TO WHICH ONLY ISOS ARE SUBJECT. Options granted
under this Plan which are designated as ISOs shall be subject to the following
terms and conditions:
(a) EXERCISE PRICE. The exercise price of an ISO shall be determined
in accordance with the applicable provisions of the Code and shall in no
event be less than the fair market value of the stock covered by the ISO at
the Grant Date; provided, however, that the exercise price of an ISO granted
to any person who owns, directly or indirectly (or is treated as owning by
reason of attribution rules, currently set forth in Code Section 424), stock
of the Company constituting more than ten percent of the total combined
voting power of all classes of outstanding stock of the Company or of any
Affiliate of the Company, shall in no event be less than 110 percent of such
fair market value.
(b) OPTION TERM. Unless an earlier expiration date is specified by the
Committee at the Grant Date in the Option Agreement, each ISO shall expire
ten (10) years from its Grant Date; except that an ISO granted to any person
who owns, directly or indirectly (or is treated as owning by reason of
applicable attribution rules currently set forth in Section 424 of the Code)
stock of the Company constituting more than ten percent of the total
combined voting power of the Company's outstanding stock, or the stock of
any Affiliate of the Company, shall expire five years from its Grant Date.
(c) DISQUALIFYING DISPOSITIONS. If stock acquired by exercise of an
ISO is disposed of within two years from the Grant Date or within one year
after the transfer of the stock to the optionee, the holder of the stock
immediately prior to the disposition shall promptly notify the Company in
writing of the date and terms of the disposition and shall provide such
other information regarding the disposition as the Company may reasonably
require. Such holder shall pay to the Company any withholding and employment
taxes which the Company in its sole discretion deems applicable. The Company
may instruct its stock transfer agent by appropriate means, including
placement of legends
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on stock certificates, not to transfer stock acquired by exercise of an ISO
unless it has been advised by the Company that the requirements of this
Section have been satisfied.
7. MANNER OF EXERCISE
An optionee wishing to exercise an Option shall give written notice to the
Company at its principal executive office, to the attention of the Secretary of
the Company, accompanied by an executed stock purchase agreement in form and
substance satisfactory to the Company, by payment of the exercise price and by
such other documents as the Committee may request. The date the Company receives
written notice of an exercise hereunder accompanied by payment of the exercise
price and all such other documents will be considered the date the Option was
exercised. Promptly after receipt of written notice of exercise of an Option,
the Company shall, without stock issue or transfer taxes to the optionee or any
other person entitled to exercise the Option, deliver to the optionee or such
other person a certificate or certificates for the requisite number of shares of
stock. An optionee or transferee of an Option shall not have any privileges as
stockholder with respect to any stock covered by the Option until the date of
issuance of a stock certificate.
8. RELATIONSHIP WITH THE COMPANY
Nothing in this Plan or any Option granted hereunder shall interfere with or
limit in any way the right of the Company to terminate any optionee's
employment, affiliation or other relationship with the Company at any time, nor
confer upon any optionee any right to continue in the employ of the Company.
9. AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN
The Board of Directors may at any time amend, alter, suspend or discontinue
this Plan. The Board of Directors may amend this Plan and the terms of any
Option outstanding hereunder if the amendment is designed to maximize federal
income tax benefits accorded to Options; provided, that with respect to
outstanding Options, the optionee consents to such amendment.
10. LIABILITY AND INDEMNIFICATION OF COMMITTEE
No member of the Committee shall be liable for any act or omission on such
member's own part, including but not limited to the exercise of any power or
discretion given to such member under this Plan, except for those acts or
omissions resulting from such member's own gross negligence or willful
misconduct. The Company shall indemnify each present and future member of the
Committee against, and each member of the Committee shall be entitled without
further act on his or her part to indemnity from the Company for, all expenses
(including attorney's fees and the amount of judgments and the amount of
approved settlements made with a view to the curtailment of costs of litigation,
other than amounts paid to the Company itself) reasonably incurred by such
person in connection with or arising out of any action, suit, or proceeding to
which the Committee or any member of the Committee may be a party by reason of
any action taken or failure to act under or in connection with the Plan or any
option granted under the Plan to the full extent permitted by law and by the
Certificate of Incorporation and Bylaws of the Company. The right of indemnity
described in this Section 10 shall be in addition to such other rights of
indemnification as the members of the Committee shall otherwise be entitled
because of their serving on the Board of Directors of the Company or as an
employee of the Company.
11. EFFECTIVE DATE OF THIS PLAN
This Plan shall become effective December 31, 1996; provided, that the Plan
is approved by the affirmative votes of the holders of a majority of the share
of Class A Common Stock present, or represented, and entitled to vote at a
meeting of the stockholders duly held not later than December 31, 1996.
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APPENDIX C
1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS OF
PHYSICIAN PARTNERS, INC.
R E C I T A L S:
The purpose of this 1996 Stock Option Plan for Non-Employee Directors of
Physician Partners, Inc. (the "Plan") is to provide the directors of Physician
Partners, Inc. (the "Company") who are not either employees or officers of the
Company, added incentive to continue in the service of the Company and a more
direct interest in the future success of the operations of the Company by
granting to such directors options (the "Options", or individually, the
"Option"), to purchase shares of the common stock, par value $0.01 per share
(the "Common Stock"), of the Company subject to the terms and conditions
described below. The Plan shall be effective as of January 1, 1997 (the
"Effective Date").
ARTICLE I
GENERAL
1.01 DEFINITIONS. For Purposes of the Plan and as used herein,
"non-employee director" shall mean an individual who (a) is now, or hereafter
becomes, a member of the Board of Directors of the Company by virtue of an
election by the stockholders of the Company, (b) is neither an employee nor an
officer of the Company and (c) has not elected to decline to participate in the
Plan pursuant to the next succeeding sentence. A director otherwise eligible to
participate in the Plan may make an irrevocable, one-time election, by written
notice to the Company within 30 days after his initial election to the Board of
Directors of the Company or, in the case of a director in office on the
Effective Date, prior to the Effective Date, to decline to participate in the
Plan. For purposes of this Plan, "employee" shall mean an individual whose wages
are subject to the withholding of federal income tax under Section 3401 of the
Internal Revenue Code of 1986, as amended from time to time (the "Code"), and
"officer" shall mean an individual elected or appointed by the Board of
Directors of the Company or chosen in such other manner as may be prescribed in
the Bylaws of the Company to serve as such except that for the purposes of this
Plan any individual serving as the Chairman of the Board, but in no other
capacity as an officer or employee, will not be deemed to be an officer of the
Company.
For purposes of this Plan, and as used herein, non-employee directors shall
be divided into two groups. The first group of non-employee directors consists
of providers whose practice of medicine is associated with an entity or
organization for which the Company performs management services ("affiliated
directors"). The second group consists of directors who are not affiliated
directors ("non-affiliated directors").
For purposes of this Plan, and as used herein, the "fair market value" of a
share of Common Stock is the closing sales price on the date in question (or, if
there was no reported sale on such date, on the last preceding day on which any
reported sale occurred) of the Common Stock as reported on NASDAQ.
1.02. OPTIONS. The Options granted hereunder shall be options that are not
qualified under Section 422 of the Code.
ARTICLE II
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company or a
committee thereof. The Board of Directors shall have no authority, discretion or
power to select the non-affiliated directors who will receive Options, to set
the number of shares to be covered by each Option granted to a non-affiliated
director, to set the exercise price or the exercise period of a non-affiliated
director's Options, or
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to alter any other terms or conditions specified herein applicable to a
non-affiliated director, except in the sense of administering the Plan subject
to the express provision of the Plan and except in accordance with Sections 3.02
and 5.02 hereof. The Board of Directors shall have the authority, discretion or
power to select the affiliated directors who receive Options, to set the number
of shares covered by each affiliated director's Options, to set the exercise
price or exercise period of an affiliated director's Options, or to alter any
other term or conditions specified herein, except in the sense of administering
the Plan subject to the express Plan provisions and in accordance with Sections
3.02 and 5.02 hereof. Subject to the foregoing limitations, the Board of
Directors or such committee shall have authority and power to adopt such rules
and regulations and to take such action as it shall consider necessary or
advisable for the administration of the Plan, and to construe, interpret and
administer the Plan. The decisions of the Board of Directors or committee
relating to the Plan shall be final and binding upon the Company, the Holders
(as such term is defined in Section 3.02 hereof) and all other persons. No
member of the Board of Directors shall incur any liability by reason of any
action or determination made in good faith with respect to the Plan or any stock
option agreement entered into pursuant to the Plan.
ARTICLE III
OPTIONS
3.01. PARTICIPATION. A non-employee director shall be granted Options to
purchase the Common Stock under the Plan on the terms and conditions herein
described.
3.02. STOCK OPTION AGREEMENTS. Each Option granted under the Plan shall be
evidenced by a written stock option agreement, which agreement shall be entered
into by the Company and the non-employee director to whom the Option is granted
(the "Holder"), and which agreement shall include, incorporate or conform to the
following terms and conditions, and such other terms and conditions of this Plan
as the Board of Directors considers appropriate in each case:
(a) OPTION GRANT DATE. Options shall be granted initially as of the
Effective Date to each non-affiliated director serving the Company as a
director on such date. Options may be granted initially as of the Effective
Date to each affiliated director as the Board of Directors determines.
Thereafter, on each January 1 during this term of the Plan, Options shall be
granted automatically to the non-affiliated directors serving the Company as
directors on such date. As of each January 1 during the term of the Plan,
the Board of Directors will determine each affiliated director who will
receive Options on such date. The date of grant of an Option pursuant to the
Plan shall be referred to hereinafter as the "Grant Date" of such Option.
Notwithstanding anything herein to the contrary, the Board of Directors may
revoke, on or prior to each January 1, the next automatic grant of Options
otherwise provided for by the Plan if no options have been granted to
employees since the preceding January 1 under the 1996 Stock Option Plan for
Employees of Physician Partners, Inc. or any other employee stock option
plan that the Company may adopt.
(b) NUMBER. Each non-affiliated director serving the Company as a
director on the Effective Date and on each Grant Date shall be granted, as
of such date, an Option to purchase 7,500 shares of Common Stock, subject to
adjustment in accordance with Section 4.02 hereof. The Board of Directors
shall determine the number of Common Shares subject to an Option granted to
an affiliated director who is serving the Company on the Effective Date and
on each Grant Date, subject to adjustment in accordance with Section 4.02
hereof. If, on any January 1 during the term of the Plan, the number of
Options scheduled to be granted to non-affiliated directors is greater than
the number of shares of Common Stock (subject to adjustment in accordance
with Section 4.02 hereof) then available for grant on that date, the
available shares shall be allocated pro rata in determining the number of
shares of Common Stock to be subject to each Option to be granted to each
such non-affiliated director on such date.
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(c) PRICE. The price at which each share of Common Stock covered by a
non-affiliated director's Option may be purchased pursuant to this Plan
shall be the fair market value of the shares on the Grant Date of such
Option. The Board of Directors shall determine the price at which each share
of Common Stock covered by an affiliated director's Option may be purchased
pursuant to this Plan.
(d) OPTION PERIOD. The period during which each non-affiliated
director's Option may be exercised shall expire, in all cases, ten years
from the Grant Date of such Option (the "Option Period"), unless terminated
sooner pursuant to Section 3.02(e) below. The Board of Directors shall
determine the exercise period during which each affiliated director's Option
may be exercised provided that in no event shall such period exceed ten
years from the Grant Date of such Option.
(e) TERMINATION OF SERVICE, DEATH, ETC. Each stock option shall
provide as follows with respect to the exercise of the Option granted
thereby in the event that the Holder ceases to be a non-employee director
for the reasons described in this Section 3.02(e):
(i) If the directorship of the Holder is terminated within the Option
Period on account of fraud, dishonesty or other acts detrimental to the
interests of the Company or any direct or indirect majority-owned
subsidiary of the Company, the Option shall automatically terminate as of
the date of such termination of directorship;
(ii) If the Holder shall die during the Option Period while a
director of the Company (or during the additional three-month period
provided by paragraph (iii) of this Section 3.02(e)), the Option may be
exercised, to the extent that the Holder was entitled to exercise it at
the date of Holder's death, within one year after such date (if otherwise
within the Option Period), but not thereafter, by the executor or
administrator of the estate of Holder, or by any person or person who
shall have acquired the Option directly from the Holder by bequest or
inheritance; or
(iii) If the directorship of a Holder is terminated for any reason
(other than the circumstances specified in paragraphs (i) and (ii) of
this Section 3.02(e)) within the Option Period, the Option may be
exercised, to the extent the Holder was able to do so at the date of
termination of the directorship, within three months after such
termination (if otherwise within the Option Period), but not thereafter.
(f) TRANSFERABILITY. No Option shall be assignable or otherwise
transferable by the Holder except by will or by the laws of descent and
distribution. During the life of the Holder, an Option shall be exercisable
only by the Holder or the Holder's guardian or legal representative.
(g) AGREEMENT TO CONTINUE IN SERVICE. Each Holder shall agree to
remain in the service of the Company, at the pleasure of the Company's
stockholders, for a continuous period of at least one year after the date of
the grant of any Option, at the retainer rate then in effect or at such
changed rate as the Company from time to time may establish.
(h) EXERCISE, PAYMENTS, ETC. Each stock option agreement shall provide
that the method for exercising the Option granted thereby shall be by
delivery to the Company of, or by sending by United States registered or
certified mail, postage prepaid, addressed to the Company (for the attention
of its secretary) of, written notice signed by Holder specifying the number
of shares of Common Stock with respect to which such Option is being
exercised. Such notice shall be accompanied by the full amount of the
purchase price of such shares. Payment may be made at the election of the
holder of the Option as follows: (i) in cash; (ii) in outstanding shares of
Common Stock at their fair market value, as determined by the Board of
Directors, on the date of exercise; or (iii) by delivery of vested Options
with a value equal to the exercise price (i.e., the difference between the
fair market value of the Common Stock on the exercise date subject to such
Option and the exercise price thereof). Any such notice shall be deemed to
be given three (3) days after the same was deposited in a regularly
maintained receptacle for the deposit of United States mail, addressed and
sent as above stated. In
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addition to the foregoing, promptly after demand by the Company, the
exercising Holder shall pay to the Company an amount equal to applicable
withholding taxes, if any, due in connection with such exercise.
(i) EXERCISE PERIOD. Each non-affiliated director's Option shall be
exercisable as to one-third ( 1/3) of the shares subject to the Option as of
each of the first, second and third anniversaries of the Grant Date. The
Board of Directors shall determine the exercise period for the shares
subject to an affiliated director's Option.
ARTICLE IV
AUTHORIZED COMMON STOCK
4.01 AVAILABLE SHARES OF COMMON STOCK. The total number of shares of
Common Stock as to which Options may be granted pursuant to the Plan shall be
100,000, except as such number of shares shall be adjusted from and after the
Effective Date in accordance with the provisions of Section 4.02 hereof. If any
outstanding Option under the Plan shall expire, be terminated, or forfeited for
any reason before the end of the Option Period, the shares of Common Stock
allocable to the unexercised portion of such Option may again be subject to the
Plan. The Company shall, at all times during the life of any outstanding
Options, retain as authorized and unissued Common Stock at least the number of
shares from time to time included in the outstanding Options or otherwise assure
itself of its ability to perform its obligations under the Plan.
4.02 ADJUSTMENTS UPON CHANGES IN COMMON STOCK. In the event the Company
shall effect a split of the Common Stock or dividend payable in Common Stock, or
in the event the outstanding Common Stock shall be combined into a smaller
number of shares, the maximum number of shares as to which Options may be
granted under the Plan shall be increased or decreased proportionately. In the
event that before delivery by the Company of all of the shares of Common Stock
in respect of which any Option has been granted under the Plan, the Company
shall have effected such a split, dividend or combination, the shares still
subject to the Option shall be increased or decreased proportionately and the
purchase price per share shall be increased or decreased proportionately so that
the aggregate purchase price for all the then optioned shares shall remain the
same as immediately prior to such split, dividend or combination.
In the event of a reclassification of the Common Stock not covered by the
foregoing provisions of this Section 4.02, or in the event of a liquidation or
reorganization, including a merger, consolidation or sale of assets, the Board
of Directors of the Company shall make such adjustment, if any, as it may deem
appropriate in the number, purchase price and kind of shares covered by the
unexercised portions of Options theretofore granted under the Plan. The
provisions of this Section 4.02 shall only be applicable if, and only to the
extent that, the application thereof does not conflict with any valid
governmental statute, regulation or rule.
4.03 CORPORATE TRANSACTIONS. New options rights may be substituted for
Options granted, or the Company's obligations as to outstanding Options may be
assumed, by an employer corporation other than the Company, or an Affiliate
thereof, in connection with any merger, consolidation, acquisition, separation,
reorganization, dissolution, liquidation, sale or like occurrence in which the
Company is involved and which the Board of Directors determines, in its absolute
discretion, would materially alter the structure. Notwithstanding the foregoing
or the provisions of Section 4.02, if such an event occurs and if such employer
corporation, or an Affiliate thereof, does not substitute new option rights for,
and substantially equivalent to, the outstanding Options granted hereunder, or
assume the outstanding Options granted hereunder, or if there is no employer
corporation, or if the Board of Directors determines, in its sole discretion,
that outstanding Options should not then continue to be outstanding, the Board
of Directors may upon 10 days prior written notice to non-employee directors in
its absolute discretion (a) shorten the period during which Options are
exercisable (provided they remain exercisable, to the extent otherwise
exercisable, for at least 10 days after the date the notice is given), or (b)
cancel Options upon payment to
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the non-employee director in cash, with respect to each Option to the extent
then exercisable, of an amount which, in the absolute discretion of the Board of
Directors, is determined to be equivalent to any excess of the fair market value
(at the effective time of the dissolution, liquidation, merger, consolidation,
acquisition, separation, reorganization, sale or other event) of the
consideration that the non-employee director would have received if the Option
had been exercised before the effective time, over the exercise price of the
Option; PROVIDED, HOWEVER, if there is a successor corporation and replacement
options are not granted by the successor corporation, all outstanding Options
shall become exercisable prior to the consummation of the transaction such that
the non-employee directors shall have not less than 10 days to exercise the
Options and become stockholders of record entitled to receive the consideration
paid to the other stockholders of the Company. If a non-employee director fails
to exercise his option within any exercise period described in this Section 4.03
and the dissolution, liquidation, merger, consolidation, sale or other event is
consummated, his option shall no longer be exercisable. Any unexercised option
shall be cancelled and terminated. The actions described in this Section 4.03
may be taken without regard to any resulting tax consequences to the
non-employee director.
ARTICLE V
GENERAL PROVISIONS
5.01. TERMINATION OF PLAN. The Plan shall terminate whenever the Board of
Directors adopts a resolution to that effect. If not sooner terminated under the
preceding sentence, the Plan shall expire at the close of business on December
31, 2005. After termination of the Plan, no Options shall be granted but the
Company shall continue to recognize Options previously granted.
5.02. AMENDMENT OF PLAN. The Board of Directors may from time to time
amend, modify, suspend or terminate the Plan. Nevertheless, no such amendment,
modification, suspension or termination shall (a) impair any Options theretofore
granted under the Plan or deprive any Holder of any shares of Common Stock which
he might have acquired through or as a result of the Plan, or (b) be made
without the approval of the stockholders of the Company where such change would
increase the total number of shares of Common Stock which may be granted under
the Plan.
5.03 TREATMENT OF PROCEEDS. Proceeds from the sale of Common Stock
pursuant to Options granted under the Plan shall constitute general funds of the
Company.
5.04 EFFECTIVENESS. The Plan shall become effective as of the Effective
Date, subject to the conditions stated in the following sentence. The Plan and
each Option granted or to be granted hereunder is conditional on and shall be of
no force and effect, and no Option shall be exercised, unless and until,
stockholders have approved the Plan by the affirmative votes of the holders of a
majority of the shares of Common Stock present, or represented, and entitled to
vote at a meeting of stockholders duly held not later than December 31, 1996.
5.05 PARAGRAPH HEADINGS. The paragraph headings included here are only for
convenience, and they shall have no effect on the interpretation of the Plan.
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APPENDIX D
1996 STOCK OPTION PLAN
FOR NON-EMPLOYEE PROVIDER AFFILIATED WITH
PHYSICIAN PARTNERS, INC.
1. PURPOSE OF THE PLAN
The 1996 Stock Option Plan for Non-Employee Physicians Affiliated with
Physician Partners, Inc. (the "Plan") was established by Physician Partners,
Inc. (the "Company"), effective December 31, 1996 to:
1.1 furnish incentives to eligible physicians chosen to receive options
because they are considered capable of responding by improving operations and
increasing profits;
1.2 increase the interest of selected physicians in the Company's welfare
through their participation in the growth in value of Class A Common Stock, $.01
par value, of the Company ("Class A Common Stock").
To accomplish the foregoing objectives, this Plan provides a means whereby
physicians may receive options to purchase Class A Common Stock. Options granted
under this Plan ("Options") will be nonqualified options ("NQOs") subject to
federal income taxation upon exercise.
2. ELIGIBLE PERSONS
2.1 GENERAL. Every person who at the date on which an Option granted to
the person becomes effective (the "Grant Date") and who is a non-employee
provider affiliated with the Company or any Affiliate or any non-employee
provider subject to an acquisition or management agreement with the Company is
eligible to receive Options under this Plan.
2.2 DEFINITION OF AFFILIATE. The term "Affiliate," as used in this Plan,
means a "parent corporation" or "subsidiary corporation," as defined in Section
424 of the Internal Revenue Code of 1986 (the "Code"). The term "employee" shall
have the meaning ascribed for purposes of Section 3401(c) of the Code and the
Treasury Regulations promulgated thereunder and shall include an officer who is
also an employee.
3. STOCK SUBJECT TO THIS PLAN
The total number of shares of stock reserved for issuance upon the exercise
of Options is 1,500,000 shares of Class A Common Stock. The shares covered by
the portion of any grant that expires unexercised under this Plan shall become
available again for grants under this Plan. The number of shares reserved for
issuance under this Plan is subject to adjustment in accordance with the
provisions for adjustment in this Plan.
4. ADMINISTRATION
This Plan shall be administered by a committee (the "Committee") of not less
than three (3) members appointed by the Board of Directors of the Company, at
least two (2) of which must be nonemployee disinterested Directors
("Disinterested Directors") as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"). The Committee may delegate
nondiscretionary administrative duties to other employees of the Company as it
deems proper. Subject to the approval of the Board of Directors and the
provisions of this Plan, the Committee shall have the authority to select the
persons to receive Options under this Plan, to fix the number of shares that
each optionee may purchase, to set the terms and conditions of each Option, and
to determine all other matters relating to this Plan. Any act approved in
writing by a majority of the members of the Committee shall be a valid act of
the Committee. Such determinations shall be final and binding on all persons. No
member of the Board of Directors or the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any option
granted under the Plan.
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5. GRANTING OF THE RIGHTS
5.1 TEN YEAR LIMITATION. No Options shall be granted under this Plan after
ten years from the date the Board of Directors of the Company adopts this Plan.
5.2 WRITTEN AGREEMENT; EFFECT. Each Option shall be evidenced by a written
agreement (the "Option Agreement"), in a form satisfactory to the Committee,
executed by the Company and by the person to whom such Option is granted.
Failure of the grantee to execute an Option Agreement shall not void or
invalidate the grant of any Option; the Option may not be exercised, however,
until the Option Agreement is executed.
6. TERMS AND CONDITIONS OF OPTIONS
Each Option shall be subject to the terms and conditions set forth in this
Section 6.1.
6.1 TERMS AND CONDITIONS TO WHICH OPTIONS ARE SUBJECT. Options shall be
subject to the following terms and conditions:
(a) CHANGES IN CAPITAL STRUCTURE. Subject to Section 6.1(b), if the
stock of the Company is changed by reason of a stock split, reverse stock
split, stock dividend, or recapitalization, or converted into or exchanged
for other securities as a result of a merger, consolidation, or
reorganization, appropriate adjustments shall be made in (A) the number and
class of shares of stock subject to this Plan and each outstanding Option,
and (B) the exercise price of each outstanding Option; provided, however,
that the Company shall not be required to issue fractional shares as a
result of any such adjustment. Each such adjustment shall be determined by
the Committee in its sole discretion, which determination shall be final and
binding on all persons.
(b) CORPORATE TRANSACTIONS. New options rights may be substituted for
Options granted, or the Company's obligations as to outstanding Options may
be assumed, by an employer corporation other than the Company, or an
Affiliate thereof, in connection with any merger, consolidation,
acquisition, separation, reorganization, dissolution, liquidation, sale or
like occurrence in which the Company is involved and which the Committee
determines, in its absolute discretion, would materially alter the
structure. Notwithstanding the foregoing or the provisions of Section
6.1(a), if such an event occurs and if such employer corporation, or an
Affiliate thereof, does not substitute new option rights for, and
substantially equivalent to, the outstanding Options granted hereunder, or
assume the outstanding Options granted hereunder, or if there is no employer
corporation, or if the Committee determines, in its sole discretion, that
outstanding Options should not then continue to be outstanding, the
Committee may upon ten days prior written notice to optionees in its
absolute discretion (A) shorten the period during which Options are
exercisable (provided they remain exercisable, to the extent otherwise
exercisable, for at least ten days after the date the notice is given), or
(B) cancel Options upon payment to the optionee in cash, with respect to
each Option to the extent then exercisable, of an amount which, in the
absolute discretion of the Committee, is determined to be equivalent to any
excess of the fair market value (at the effective time of the dissolution,
liquidation, merger, consolidation, acquisition, separation, reorganization,
sale or other event) of the consideration that the optionee would have
received if the Option had been exercised before the effective time, over
the exercise price of the Option; provided, however, if there is a successor
corporation and replacement options are not granted by the successor
corporation, all outstanding Options shall become exercisable prior to the
consummation of the transaction such that the optionees shall have not less
than ten days to exercise the Options and become stockholders of record
entitled to receive the consideration paid to the other stockholders of the
Company. If an optionee fails to exercise his option within any exercise
period described in this paragraph and the dissolution, liquidation, merger,
consolidation, sale or other event is consummated, his option shall no
longer be exercisable. Any unexercised option shall be cancelled and
terminated. Notwithstanding anything herein to the contrary, nothing shall
extend an optionee's right to exercise a NQO after the expiration of ten
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(10) years from the date it is granted. The actions described in this
Section may be taken without regard to any resulting tax consequences to the
optionee.
(c) OPTION GRANT DATE. Each Option Agreement shall specify the date as
of which it shall be effective, which date shall be the Grant Date
(determined pursuant to Section 5.4 in the case of advance approvals).
(d) FAIR MARKET VALUE. For purposes of this Plan, the fair market
value of the Company's Class A Common Stock shall be determined as follows:
(1) if the stock is listed on any established stock exchange or a
national market system, including without limitation the National Market
System of the National Association of Securities Dealers Automated
Quotation System, its fair market value shall be the closing sales price
for the stock, or the mean between the high bid and low asked prices if
no sales were reported, as quoted on such system or exchange (or the
largest such exchange) for the date the value is to be determined (or if
there are no sales or bids for such date, then for the last preceding
business day on which there were sales or bids), as reported in the Wall
Street Journal or similar publication;
(2) if the stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its fair market value shall
be the mean between the high bid and low asking prices for the stock on
the date the value is to be determined (or if there are no quoted prices
for the date of grant, then for the last preceding business day on which
there were quoted prices);
(3) in the absence of an established market for the stock, the fair
market value shall be determined in "good faith" by the Committee, with
reference to the Company's net worth, prospective earning power,
dividend-paying capacity, and other relevant factors, including sales for
the most recent 12 month period, the goodwill of the Company, the
economic outlook in the Company's industry, the Company's position in the
industry and its management and the values of stock of other corporations
in the same or a similar line of business.
(e) TIME OF OPTION EXERCISE. The Company shall not grant any Options
which may become exercisable at a rate in excess of 20% per annum from the
date of such grant without the written consent of a majority of the
Disinterested Directors.
(f) NONASSIGNABILITY OF OPTION RIGHTS. No Option shall be assignable
or otherwise transferable by the optionee except by will or by the laws of
descent and distribution. During the life of the optionee, an Option shall
be exercisable only by the optionee or the optionee's guardian or legal
representative.
(g) PAYMENT. Except as provided below, payment in full, in cash, shall
be made for all stock purchased at the time written notice of exercise of an
Option is given to the Company, and proceeds of any payment shall constitute
general funds of the Company. At the time an Option is granted or before it
is exercised, the Committee, in the exercise of its absolute discretion, may
authorize any one or more of the following additional methods of payment:
(1) acceptance of the optionee's full recourse promissory note for
some or all of the aggregate exercise price of the shares being acquired
(except for the aggregate par value of the shares being acquired, which
must be paid in cash or other lawful consideration under applicable law),
payable on such terms and bearing such interest rate as determined by the
Committee, and secured in such manner as the Committee shall approve;
including, without limitation, by a security interest in Class A Common
Stock or other securities of the Company;
(2) delivery by the optionee of Class A Common Stock or other
securities of the Company already owned by the optionee for all or part
of the aggregate exercise price of the shares being acquired, provided
the fair market value of such Class A Common Stock or securities is equal
on the date of exercise to the aggregate exercise price of the shares
being acquired, or such portion
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thereof as the optionee is authorized to pay by delivery of such Class A
Common Stock or securities; and
(3) any other property, so long as such property is acceptable to the
Committee and constitutes valid consideration under applicable law for
the shares being acquired and is surrendered in good form for transfer.
(h) AFFILIATION.
(1) Any Option or portion thereof which has not expired or been
exercised on or before the date on which an optionee ceases to be
affiliated with the Company shall expire ninety (90) days after the date
of cessation of such affiliation.
(2) Notwithstanding the foregoing, if the optionee ceases to be
affiliated with the Company due to the permanent disability or death of
the optionee, the optionee, the optionee's personal representative or any
other person who acquires option rights from the optionee by will or the
applicable laws of descent and distribution, may, within twelve months
after the date of cessation, exercise such option rights to the extent
they were exercisable on the date of cessation.
(i) OTHER PROVISIONS. Each Option Agreement may contain such other
terms, provisions, and conditions not inconsistent with this Plan, including
rights of repurchase, as may be determined by the Committee.
(j) EXERCISE PRICE. The exercise price of an NQO shall not be less
than 85 percent of the fair market value of the stock subject to the Option
on the Grant Date; provided, however, that the exercise price of an NQO
granted to any person who owns, directly or indirectly (or is treated as
owning by reason of attribution rules, currently set forth in Code Section
424), stock of the Company constituting more than ten percent of the total
combined voting power of all classes of outstanding stock of the Company or
of any Affiliate of the Company, shall in no event be less than 100 percent
of such fair market value.
(k) OPTION TERM. Unless an earlier expiration date is specified by the
Committee at the Grant Date in the Option Agreement, each NQO shall expire
ten years from its Grant Date.
7. MANNER OF EXERCISE
An optionee wishing to exercise an Option shall give written notice to the
Company at its principal executive office, to the attention of the Secretary of
the Company, accompanied by an executed stock purchase agreement in form and
substance satisfactory to the Company, by payment of the exercise price and by
such other documents as the Committee may request. The date the Company receives
written notice of an exercise hereunder accompanied by payment of the exercise
price and all such other documents will be considered the date the Option was
exercised. Promptly after receipt of written notice of exercise of an Option,
the Company shall, without stock issue or transfer taxes to the optionee or any
other person entitled to exercise the Option, deliver to the optionee or such
other person a certificate or certificates for the requisite number of shares of
stock. An optionee or transferee of an Option shall not have any privileges as
stockholder with respect to any stock covered by the Option until the date of
issuance of a stock certificate.
8. RELATIONSHIP WITH THE COMPANY
Nothing in this Plan or any Option granted hereunder shall interfere with or
limit in any way the right of the Company to terminate any optionee's
affiliation or other relationship with the Company at any time.
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9. AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN
The Board of Directors may at any time amend, alter, suspend or discontinue
this Plan. The Board of Directors may amend this Plan and the terms of any
Option outstanding hereunder if the amendment is designed to maximize federal
income tax benefits accorded to Options; provided, that with respect to
outstanding Options, the optionee consents to such amendment.
10. LIABILITY AND INDEMNIFICATION OF COMMITTEE
No member of the Committee shall be liable for any act or omission on such
member's own part, including but not limited to the exercise of any power or
discretion given to such member under this Plan, except for those acts or
omissions resulting from such member's own gross negligence or willful
misconduct. The Company shall indemnify each present and future member of the
Committee against, and each member of the Committee shall be entitled without
further act on his or her part to indemnity from the Company for, all expenses
(including attorney's fees and the amount of judgments and the amount of
approved settlements made with a view to the curtailment of costs of litigation,
other than amounts paid to the Company itself) reasonably incurred by such
person in connection with or arising out of any action, suit, or proceeding to
which the Committee or any member of the Committee may be a party by reason of
any action taken or failure to act under or in connection with the Plan or any
option granted under the Plan to the full extent permitted by law and by the
Certificate of Incorporation and Bylaws of the Company. The right of indemnity
described in this Section 10 shall be in addition to such other rights of
indemnification as the members of the Committee shall otherwise be entitled
because of their serving on the Board of Directors of the Company or as an
employee of the Company.
11. EFFECTIVE DATE OF THIS PLAN
This Plan shall become effective December 31, 1996; provided, that the Plan
is approved by the affirmative votes of the holders of a majority of the share
of Class A Common Stock present, or represented, and entitled to vote at a
meeting of the stockholders duly held not later than December 31, 1996.
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APPENDIX E
PHYSICIAN PARTNERS, INC. CHANGE IN CONTROL PLAN
SECTION 1
INTRODUCTION
1.1. PURPOSE. Physician Partners, Inc. ("PPI") has established the
Physician Partners, Inc. Change In Control Plan (the "Plan") to enable PPI and
its Subsidiaries and Affiliates (as such terms are defined in Section 1.3
hereof) (collectively, the "Company") to provide severance benefits to eligible
executive or management employees whose employment is terminated following a
Change in Control of the Company. It is the intent of the Company that the Plan,
as set forth herein, constitute an "employee welfare benefit plan" within the
meaning of Section 3(1) of the Employee Retirement Income Act of 1974 ("ERISA")
and comply with the applicable requirements of ERISA.
1.2. EFFECTIVE DATE, PLAN YEAR. The "Effective Date" of the Plan is
December 31, 1996. A "Plan Year" is the 12-month period beginning on October 1
and ending on the following September 30.
1.3. EMPLOYERS. Any Subsidiary or Affiliate of PPI employing an employee
who has been designated as a Participant by the Committee shall be deemed to
have adopted the Plan. A "Subsidiary" of PPI is any corporation more than 50
percent of the voting stock of which is owned, directly or indirectly, by PPI.
An "Affiliate" of PPI is any corporation more than 50 percent of the voting
stock of which is owned, directly or indirectly, by the owner or owners of more
than 50 percent of the voting stock of PPI.
1.4. ADMINISTRATION. The Plan is administered by the Compensation
Committee of the Board of Directors of PPI (the "Committee"). The Committee,
from time to time, may adopt such rules and regulations as may be necessary or
desirable for the proper and efficient administration of the Plan and as are
consistent with the terms of the Plan. The Committee, from time to time, may
also appoint such individuals to act as its representatives as the Committee
considers necessary or desirable for the effective administration of the Plan.
Any notice or document required to be given or filed with the committee will be
properly given or filed if delivered or mailed, by registered mail, postage
prepaid, to the Committee at 111 SW Columbia Street, Suite 725, Portland, Oregon
97201.
SECTION 2
PARTICIPATION
The Committee shall designate from time to time those employees of the
Company employed in an executive or management position who shall participate in
the plan (a "Participant"). An employee who has been so designated shall
participate by signing an agreement with the Company, substantially in the form
attached hereto as Exhibit A ("Participant's Agreement"), which shall specify
the benefits the Participant is entitled to receive should the Participant's
employment terminate following a Change in Control of the Company and the terms
and conditions under which those benefits will be provided. A Participant's
Agreement implements and forms a part of the Plan as respects the Participant's
participation in the Plan. To the extent there are any inconsistencies between
the Plan document and a Participant's Agreement, the terms of the Participant's
Agreement shall be controlling. No employee other those designated by the
Committee shall be eligible to participate in the Plan.
SECTION 3
PLAN BENEFITS
3.1. BENEFITS FOLLOWING A CHANGE IN CONTROL. If a Participant's employment
with the Company terminates within twenty-four (24) months following a Change in
Control, the Participant shall be entitled to the benefits specified in the
Participant's Agreement and such benefits shall be paid at such time, in such
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manner and subject to such conditions as are specified in the Agreement. A
Participant's entitlement to benefits as specified in the Participant's
Agreement shall depend upon whether the Participant's termination is voluntary
or involuntary and whether for Cause (as such term is defined below), if
involuntary, or for Good Reason (as such term is defined below), if voluntary.
3.2. NON-COMPETITION AND NON-SOLICITATION. In consideration for the
benefits provided for under a Participant's Agreement, the Participant shall
agree that during the 24-month period following the Participant's date of
termination (the "Severance Period"), the Participant:
(a) will not, without the prior written consent of Company, either
jointly or individually, directly or indirectly, whether as an employee,
officer, director, agent, consultant or otherwise (i) compete with PPI, any
Subsidiary or Affiliate of PPI, [New Corvallis PC Sub, New HealthFirst PC
Sub, New Medford PC Sub] or any entity that, directly or indirectly,
controls or is controlled by or is under common control with the Company
(collectively, "Company Affiliates") or any of the facilities (the
"Facilities") operated by the Company or any of the Company Affiliates at
the time of termination within the twenty-five (25) mile radius of each such
Facility (the "Restricted Area"), (ii) own, manage, operate, join, control,
advise, consult with, provide services to, or be employed by or participate
in the ownership, operation, management or control (other than as a
stockholder owning less than five percent of the capital stock of a company
whose stock is publicly traded on a national securities exchange) of any
business engaged in the provision of services provided by the Company or any
of the Company Affiliates or at any of the Facilities (a "Competing
Business") within the Restricted Area or (iii) advise, assist, consult with,
lease or sell real property to or aid in the establishment or operation of a
Competing Business in the Restricted Area and
(b) will not, without the prior written consent of Company, alone or in
association with others, solicit on behalf of the Participant, or any
Competing Business, any employee of Company, or any of the Company
Affiliates, for employment with a Competing Business.
If a Participant fails to comply with the restrictions of this subsection 2.2
and the Participant's Agreement, participation in the Plan shall immediately
terminate and the Participant shall forfeit any remaining unpaid benefits.
3.3. CHANGE IN CONTROL. For purposes of the Plan a "Change in Control"
shall have occurred if: (a) any "Person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")
other than PPI, any corporation owned, directly or indirectly, by the
stockholders of PPI in substantially the same proportions as their ownership of
stock in PPI, or any trustee or other fiduciary holding securities under a
Company employee benefit plan or such proportionately owned corporation),
becomes the "beneficial owner" (as such term is defined in rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of PPI representing 20% or
more of the combined voting power of PPI's then outstanding securities; (b)
during any period of not more than 24 months, individuals who at the beginning
of such period constitute the Board of Directors of PPI, and any new director
(other than a director designated by a Person who has entered into an agreement
with PPI to effect a transaction described in paragraph (a), (c), or (d) of this
Section 6) whose election by the board or nomination for election by PPI's
stockholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of the period or
whose election or nomination for election was previously so approved, cease for
any reason to constitute at least a majority thereof; (c) the stockholders of
PPI approve a merger or consolidation of PPI with any other corporation, other
than (i) a merger or consolidation which would result in the voting securities
of PPI outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 60% of the combined voting power of the voting
securities of PPI or such surviving entity outstanding immediately after such
merger or consolidation, or (ii) a merger or consolidation effected to implement
a recapitalization of PPI (or similar transaction) in which no Person acquires
more than 20% of the combined voting power of PPI's then outstanding securities;
or (d) the
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stockholders of PPI approve a plan of complete liquidation of PPI or an
agreement for the sale or disposition by PPI of all or substantially all of its
assets (or any transaction having a similar effect). PPI may also determine, in
its discretion, that a sale of a substantial portion of its assets or one of its
businesses constitutes a "Change of Control" with respect to any Participant if
the Participant is employed in the affected operation.
3.4. TERMINATIONS FOR CAUSE AND GOOD REASON. A Participant will be
considered to have been terminated for "Cause" if the termination is by reason
of the Participant willfully engaging in conduct demonstrably and materially
injurious to the Company, the Participant being convicted of or confessing to a
crime involving dishonesty or moral turpitude or the Participant's willful and
continued failure for a significant period of time to perform the Participant's
duties after a demand for substantial performance has been delivered to the
Participant by the Board of Directors of PPI which demand specifically
identifies the manner in which the Board believes that the Participant has not
substantially performed his duties. A Participant's termination shall be
considered to have been for "Good Reason" if the Participant's termination is by
reason of the occurrence of any of the following events within twenty-four (24)
months following a Change in Control without the Participant's express written
consent:
(a) any change in the Participant's title, authorities, responsibilities
(including reporting responsibilities) which, in the Participant's judgment,
represents an adverse change; the assignment to the Participant of any
duties or work responsibilities which, in his reasonable judgment, are
inconsistent with such title, authorities or responsibilities; or any
removal of the Participant from, or failure to reappoint or reelect him to
any of such positions, except if any such changes are because of disability,
retirement or Cause;
(b) a reduction in or failure to pay any portion of the Participant's
annual base salary as in effect on the date of the Change in Control or as
the same may be increased from time to time thereafter;
(c) the failure by the Company to provide the Participant with
compensation and benefits (including, without limitation, incentive, bonus
and other compensation plans and any vacation, medical, hospitalization,
life insurance, dental or disability benefit plan), or cash compensation in
lieu thereof, which are, in the aggregate, no less favorable than those
provided by the Company to the Participant immediately prior to the
occurrence of the Change in Control;
(d) any breach by the Company of any provision of a Participant's
Agreement; and
(e) the failure of the Company to obtain a satisfactory agreement from
any successor or assign of the Company to assume and agree to perform the
Participant's Agreement.
SECTION 4
PAYMENT OF BENEFITS
4.1. AGREEMENT GOVERNS. Any benefits under the Plan shall be payable at
such time, and pursuant to the terms and conditions of each Participant's
Agreement.
4.2. FORM OF PAYMENT. Subject to the terms of a Participant's Agreement,
benefits shall be paid in equal installments according to the Company's normal
payroll schedule. In the event of a Participant's death before the Participant
receives all benefits to which he otherwise would be entitled under the Plan,
payment shall be made to the Participant's beneficiary in installments or a lump
sum, as determined by the Committee.
4.3. DESIGNATION OF BENEFICIARY. By signing a form furnished by the
Committee, each Participant may designate any person or persons to whom his
benefits are to be paid if he dies before he receives all of his benefits. A
beneficiary designation form will be effective only when the form is filed with
the Committee while the Participant is still alive and will cancel all
beneficiary designation forms previously filed by the Participant with respect
to this Plan. If a deceased Participant has failed to designate a beneficiary as
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provided above, or if the designated beneficiary predeceases the participant,
payment of the Participant's benefits shall be made to the Participant's estate.
If a designated beneficiary dies before complete payment of any benefits
attributable to a Participant, remaining benefits shall be paid to the
beneficiary's estate.
SECTION 5
FINANCING PLAN BENEFITS
All benefits payable under the Plan shall be paid directly by the Company
out of general assets. The Company shall not be required to segregate on its
books or otherwise any amount to be used for the payment of benefits under the
Plan.
SECTION 6
OTHER EMPLOYMENT
A Participant shall not be required to mitigate the amount of any payment or
benefit provided for under the Plan by seeking other employment or otherwise nor
shall the amount of any payment or benefit provided for under the Plan be
reduced by any compensation earned by the Participant as a result of other
employment.
SECTION 7
MISCELLANEOUS
7.1. INFORMATION TO BE FURNISHED BY PARTICIPANTS. Each Participant must
furnish to the Committee such documents, evidence, data or other information as
the Committee consider necessary or desirable for the purpose of administering
the Plan. Benefits under the Plan for each Participant are provided on the
condition that he furnish full, true and complete data, evidence or other
information, and that he will promptly sign any document related to the Plan,
requested by the Committee.
7.2. CLAIMS REVIEW. Any claim for benefits under the Plan or a
Participant's Agreement by a Participant shall be made in writing and delivered
to the Committee. If a Participant, or any beneficiary following the
Participant's death (collectively, the "Claimant"), believes he has been denied
any benefits or payments under the Plan or Agreement, either in total or in an
amount less than the full benefit or payment to which the Claimant would
normally be entitled, the Committee shall advise the Claimant in writing of the
amount of the benefit, or payment, if any, and the specific reasons for the
denial. The Committee shall also furnish the Claimant at that time with a
written notice containing:
(a) A specific reference to pertinent provisions of the Plan or the
Participant's Agreement;
(b) A description of any additional material or information necessary
for the Claimant to perfect the claim if possible, and an explanation of why
such material or information is needed; and
(c) An explanation of the claim review procedure set forth below. Within
60 days of receipt of the information described above, a Claimant shall, if
further review is desired, file a written request for reconsideration with
the Committee. So long as the Claimant's request for review is pending
(including such 60-day period), Claimant or his duly authorized
representative may review pertinent documents and may submit issues and
comments in writing to the Committee. A final and binding decision shall be
made by the Committee within 60 days of the filing by the Claimant of the
request for reconsideration; provided, however, that if the Committee, in
its discretion, feels that a hearing with the Claimant or his representative
present is necessary or desirable, this period shall be extended an
additional 60 days. The decision by the Committee shall be conveyed to the
Claimant in writing and shall include specific reasons for the decision,
written in a manner calculated to be understood by the Claimant, which
specifically references to the pertinent provisions of the Plan or the
Participant's
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Agreement on which the decision is based. The Committee shall use ordinary
care and diligence in the performance of its duties.
7.3. EVIDENCE. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person relying
thereon considers pertinent and reliable, and signed, made or presented by the
proper party or parties.
7.4. FEES AND EXPENSES. The Company shall pay all reasonable legal fees
and related expenses (including the reasonable costs of experts, evidence and
counsel), when and as incurred by a Participant, as a result of contesting or
disputing any termination of employment of the Participant following a Change in
Control whether or not such contest or dispute is resolved in the Participant's
favor but only if the Participant was seeking in good faith to obtain or enforce
any right or benefit provided by the Plan or the Participant's Agreement or by
any other plan or arrangement maintained by the Employers under which the
Participant is or may be entitled to receive benefits.
7.5. ACTION BY EMPLOYER. Any action required of or permitted by the
Company under the Plan shall be by resolution of its Board of Directors, by
resolution of a duly authorized committee of its Board of Directors, or by a
person or persons authorized by resolutions of its Board of Directors or such
committee.
7.6. CONTROLLING LAWS. Except to the extent superseded by laws of the
United States, the laws of Oregon shall be controlling in all matters relating
to the Plan.
7.7. INTERESTS NOT TRANSFERABLE. The interests of persons entitled to
benefits under the Plan are not subject to their debts or other obligations and,
except as may be required by the tax withholding provisions of the Internal
Revenue Code or any state's income tax act, or pursuant to an agreement between
a Participant and the Employers, may not be voluntarily sold, transferred,
alienated, assigned or encumbered.
7.8. MISTAKE OF FACT. Any mistake of fact or misstatement of fact shall be
corrected when it becomes known and proper adjustment made by reason thereof.
7.9. SEVERABILITY. In the event any provision of the Plan or an Agreement
shall be held to be illegal or invalid for any reason, such illegality or
invalidity shall not affect the remaining parts of the Plan or Agreement, and
the Plan or Agreement shall be construed and enforced as if such illegal or
invalid provisions had never been con-tained in the Plan or Agreement.
7.10. WITHHOLDING. The Company will withhold from any amounts payable
under the Plan all federal, state, city and local taxes as shall be legally
required and any applicable insurance premiums, as well as any other amounts
authorized or required by Company policy including, but not limited to,
withholding for garnishments and judgments or other court orders.
7.11. EFFECT ON OTHER PLANS OR AGREEMENTS. Payments or benefits provided
to a Participant under any Company stock, deferred compensation, savings,
retirement or other employee benefit plan are governed solely by the terms of
such plan. Any obligations or duties of a Participant pursuant to any
non-competition or other agreement with the Company shall not be affected by the
receipt of benefits under this Plan.
SECTION 8
AMENDMENT AND TERMINATION
8.1. AMENDMENT AND TERMINATION. PPI reserves the right, to amend the Plan
at any time or to terminate the Plan at any time provided that no such amendment
or termination of the Plan shall affect the provisions of any Participant's
Agreement then in force under the Plan.
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EXHIBIT A
AGREEMENT
UNDER
PHYSICIAN PARTNERS, INC. CHANGE IN CONTROL PLAN
(CAPP)
THIS AGREEMENT is made as of
- ------------, 199
- -by and between
- ---------, a
- ---------corporation (the "Company") and
- --------- (the "Employee") under the Physician Partners, Inc. Change in Control
Plan (the "Plan").
WHEREAS, Company considers the maintenance of a vital management group to be
essential to protecting and enhancing the best interests of Company and its
stockholders and to that end Company has established the Plan to provide
benefits to certain management employees in the event their employment is
terminated following a change in control of Company, participation in which Plan
is evidenced by an individual agreement between Company and each participating
employee; and
WHEREAS, Employee is a member of Company's management group and Company has
determined that to reinforce and encourage the continued attention and
dedication of Employee to his duties free from distractions which could arise in
anticipation of or subsequent to a Change in Control of the Company, it should
extend participation in the Plan to Employee;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the Company and Employee agree that Employee shall become a Participant in the
Plan subject to the following terms which form a part of the Plan with respect
to Employee's participation therein.
1. TERM AND NATURE OF AGREEMENT. This Agreement and Employee's
participation in the Plan shall commence as of the date hereof and shall
continue in effect until
- ---------,
- ----. As of
- ---------,
- ---- and each third
- --------- occurring thereafter, this Agreement shall be automatically renewed
for a term of three (3) years unless Company gives written notice to Employee at
least 90 days prior to the renewal date that this Agreement will not be
extended. Notwithstanding the foregoing, if a Change in Control (as hereinafter
defined) occurs during the last two (2) years of any term of this Agreement, the
term of this Agreement and Employee's Plan participation shall automatically be
extended for a period of twenty-four (24) months after the end of the month in
which the Change in Control occurs. If Employee's employment with Company
terminates prior to a Change in Control, this Agreement and Employee's
participation in the Plan shall automatically expire. Furthermore, Employee may
terminate this Agreement and his participation in the Plan at any time by giving
Company 30 days' advance written notice. This Agreement which evidences
Employee's participation in the Plan shall be construed and enforced under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") as an
unfunded welfare benefit plan. The Plan and this Agreement shall be administered
by the Compensation Committee of the Board of Directors of the Company (the
"Committee").
2. SEVERANCE BENEFITS FOLLOWING A CHANGE IN CONTROL. If Employee's
employment with the Company is terminated within twenty-four (24) months
following a Change in Control, Employee shall be entitled to the following
severance benefits (in addition to any non-severance compensation and benefits
provided for under any of Company's employee benefit plans, policies and
practices or under the terms of any other contracts, but in lieu of any
severance pay under any Company employee benefit plan, policy and practice or
under the terms of any other contract including any employment contract):
(a) If Employee's employment is terminated by reason of Employee's
disability, retirement or death or by Employee other than for Good Reason,
the Company shall pay Employee his full base salary through the Date of
Termination at the rate in effect at the time of termination (or the date of
death in the case of Employee's death), plus any bonus or incentive
compensation award which, pursuant to the terms of any compensation or
incentive plan, Employee is entitled to receive but which has not yet been
paid.
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(b) If Employee's employment is terminated for Cause, the Company shall
pay Employee his full base salary through the Date of Termination at the
rate in effect at the time Notice of Termination is given plus any bonus or
incentive compensation award which, pursuant to the terms of any
compensation or incentive plan, Employee is entitled to receive but which
has not yet been paid.
(c) If Employee's employment is terminated by Company other than for
Cause or by Employee for Good Reason, then:
(i) Within five (5) days after the Date of Termination, Company shall
pay Employee his full base salary through the Date of Termination at the
greater of the rate in effect at the time the Change in Control occurred
or the rate in effect when the Notice of Termination was given plus an
amount equal to 100% of Employee's Target Annual Bonus (as such term is
defined below).
(ii) Company shall pay Employee a gross severance benefit equal to
the product of three (3) times the sum of (A) Employee's Annual Base
Salary at the greater of the rate in effect at the time the Change in
Control occurred or the rate in effect when Notice of Termination was
given and (B) Employee's Target Annual Bonus. The severance benefit shall
be paid during the ensuing 36-month period in equal installments
according to Company's normal payroll schedule beginning with the first
payroll period in which Employee's Date of Termination occurs. Employee's
"Annual Base Salary" shall mean the yearly salary rate established from
time to time by the Company as Employee's regular salary for the next
succeeding twelve (12) month period, payable pursuant to the Company's
payroll on a periodic basis and Employee's "Target Annual Bonus" shall
mean the maximum bonus Employee could earn under Company's Short Term
Incentive Plan for the year in which his Date of Termination occurs.
(iii) Any outstanding options to purchase stock of Company held by
Employee shall immediately vest and become exercisable in full in
accordance with their terms and the provisions of Company's omnibus
incentive plan.
(iv) Company shall pay the costs of a reasonable outplacement service
until Employee is employed on a full time basis.
3. SECTION 280G LIMITATIONS. Notwithstanding any other provisions of this
Agreement, in the event that any payment or benefit received or to be received
by Employee in connection with a Change in Control or the termination of
Employee's employment (whether pursuant to the terms of this Agreement or any
other plan, arrangement or agreement with Company, with any person whose actions
result in a Change in Control of Company or with any person affiliated with
Company or such person) (all such payments and benefits, including the severance
payments and benefits provided herein, being hereinafter called "Total
Payments") would not be deductible (in whole or in part) as a result of Section
280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the
payments and benefits required under this Agreement shall be reduced to the
extent necessary to eliminate the disallowance of the deduction under Code
Section 280G after taking into account any reduction in the Total Payments
required by such other plans, arrangements or agreements because of Code Section
280G. For purposes of this limitation there shall not be taken into account any
payment or benefit which in the opinion of tax counsel selected by Company does
not constitute a "parachute payment" within the meaning of Code Section
280G(b)(2). The value of any non-cash benefit or any deferred payment or benefit
included in the Total Payments shall be determined by Company's independent
auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the
Code. If it is established pursuant to a final determination of a court or an
Internal Revenue Service proceeding that, notwithstanding the good faith of
Employee and Company in applying the terms of this Section 3, any portion of the
Total Payments are not deductible by reason of Code Section 280G, Employee shall
have an obligation to pay Company upon demand an amount equal to the excess of
the Total Payments provided to Employee over the payments and benefits that can
provide to Employee on a fully deductible basis.
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4. NON-COMPETITION AND NON-SOLICITATION. In consideration for the
severance benefits called for under paragraph 2(c) above, Employee agrees that
during the 24-month period following his Date of Termination (the "Severance
Period"), Employee:
(a) will not, without the prior written consent of Company, either
jointly or individually, directly or indirectly, whether as an employee,
officer, director, agent, consultant or otherwise (i) compete with the
Company Physician Partners Subsidiary, Corvallis P.C. Subsidiary,
HealthFirst P.C. Subsidiary, Medford P.C. Subsidiary or any entity that,
directly or indirectly, controls or is controlled by or is under common
control with the Company ("Company Affiliates") or any of the facilities
(the "Facilities") operated by the Company or any of the Company Affiliates
at the time of termination within the twenty-five (25) mile radius of each
such Facility (the "Restricted Area"), (ii) own, manage, operate, join,
control, advise, consult with, provide services to, or be employed by or
participate in the ownership, operation, management or control (other than
as a stockholder owning less than five percent of the capital stock of a
company whose stock is publicly traded on a national securities exchange) of
any business engaged in the provision of services provided by the Company or
any of the Company Affiliates or at any of the Facilities (a "Competing
Business") within the Restricted Area or (iii) advise, assist, consult with,
lease or sell real property to or aid in the establishment or operation of a
Competing Business in the Restricted Area.
(b) will not, without the prior written consent of Company, alone or in
association with others, solicit on behalf of Employee, or any Competing
Business, any employee of Company, or any of the Company Affiliates, for
employment with a Competing Business.
Should Employee fail to comply with the restrictions contained in this Section
3, this Agreement shall immediately terminate and Employee shall forfeit any
remaining unpaid benefits under this Agreement.
5. OTHER EMPLOYMENT. Employee shall not be required to mitigate the amount
of any payment or benefit provided for under this Agreement by seeking other
employment or otherwise nor shall the amount of any payment or benefit provided
for in this Agreement be reduced by any compensation earned by Employee as a
result of other employment. Payment to Employee pursuant to this Agreement shall
constitute the entire obligation of the Company for severance pay and full
settlement of any claim for severance pay under law or in equity that Employee
might otherwise assert against the Company or any of its employees, officers or
directors on account of Employee's termination.
6. CHANGE IN CONTROL. For purposes of this Agreement a "Change in Control"
shall have occurred if: (a) any "Person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")
other than Company, any corporation owned, directly or indirectly, by the
stockholders of Company in substantially the same proportions as their ownership
of stock of Company, and any trustee or other fiduciary holding securities under
a Company employee benefit plan or such proportionately owned corporation),
becomes the "beneficial owner" (as such term is defined in rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of Company representing 20%
or more of the combined voting power of Company's then outstanding securities;
(b) during any period of not more than 24 months, individuals who at the
beginning of such period constitute the Board of Directors of Company, and any
new director (other than a director designated by a Person who has entered into
an agreement with Company to effect a transaction described in paragraphs (a),
(c) or (d) of this Section 6) whose election by the board or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute at least a majority
of the PPI Board; (c) the stockholders of Company approve a merger or
consolidation of Company with any other entity or corporation, other than (i) a
merger or consolidation which would result in the voting securities of Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 60% of the combined voting power of the voting
securities of Company or such surviving
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entity outstanding immediately after such merger or consolidation, or (ii) a
merger or consolidation effected to implement a recapitalization of Company (or
similar transaction) in which no Person acquires more than 20% of the combined
voting power of Company's then outstanding securities; or (d) the stockholders
of Company approve a plan of complete liquidation of Company or an agreement for
the sale or disposition by Company of all or substantially all of its assets (or
any transaction having a similar effect). Company may also determine, in its
discretion, that a sale of a substantial portion of its assets or one of its
businesses constitutes a "Change of Control" with respect to Employee if
Employee is employed in the affected operation.
7. TERMINATIONS FOR CAUSE AND GOOD REASON. Employee will be considered to
have been terminated for "Cause" if the termination is by reason of Employee
willfully engaging in conduct demonstrably and materially injurious to the
Company, Employee being convicted of or confessing to a crime involving
dishonesty or moral turpitude or Employee's willful and continued failure for a
significant period of time to perform Employee's duties after a demand for
substantial performance has been delivered to Employee by the Board of Directors
of Company which demand specifically identifies the manner in which the Board
believes that Employee has not substantially performed his duties. Employee's
termination shall be considered to have been for "Good Reason" if Employee's
termination is be reason of the occurrence of any of the following events within
24 months following a Change in Control without Employee's express written
consent:
(a) any change in Employee's title, authorities, responsibilities
(including reporting responsibilities) which, in Employee's reasonable
judgment, represents an adverse change; the assignment to Employee of any
duties or work responsibilities which, in his reasonable judgment, are
inconsistent with such title, authorities or responsibilities; or any
removal of Employee from, or failure to reappoint or reelect him to any of
such positions, except if any such changes are because of disability,
retirement or Cause;
(b) a reduction in or failure to pay any portion of Employee's Annual
Base Salary as in effect on the date of the Change in Control or as the same
may be increased from time to time thereafter;
(c) the failure by Company to provide Employee with compensation and
benefits (including, without limitation, incentive, bonus and other
compensation plans and any vacation, medical, hospitalization, life
insurance, dental or disability benefit plan), or cash compensation in lieu
thereof, which are, in the aggregate, no less favorable than those provided
by Company to Employee immediately prior to the occurrence of the Change in
Control;
(d) any breach by Company of any provision of this Agreement; and
(e) the failure of Company to obtain a satisfactory agreement from any
successor or assign of Company to assume and agree to perform this
Agreement, as required in Section 9 of this Agreement.
Employee's continued employment after the expiration of 60 days from any action
which would constitute Good Reason under paragraph 7(a) above shall constitute a
waiver of rights with respect to such action constituting Good Reason under this
Agreement.
8. NOTICE OF TERMINATION. Any purported termination of employment by the
Company or by Employee shall be communicated by a written Notice of Termination
to the other party which notice is given in accordance with Section 11 of this
Agreement. No purported termination shall be effective without such a Notice of
Termination. The Notice of Termination shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of Employee's
employment and shall specify the Date of Termination. The "Date of Termination"
shall mean the date specified in the Notice of Termination provided that in no
case shall the date be less than thirty (30) days or more than sixty (60) days
after the date the Notice of Termination is given. If within thirty (30) days
after any Notice of Termination is given the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date on which the dispute is
finally
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determined either by mutual written agreement of the parties, or by the final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been taken).
9. SUCCESSORS. Company will require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Company to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
Company would be required to perform if no such succession or assignment had
taken place. As used in this Agreement, "Company" shall include any successor or
assign to its business and/or assets which assumes and agrees to perform this
Agreement by operation of law, or otherwise. This Agreement shall inure to the
benefit of and be enforceable by Employee's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If Employee should die while any amounts would still be payable to him
hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
Employee's beneficiary and if there is no such beneficiary, to Employee's estate
in a lump sum.
10. FEES AND EXPENSES. Company shall pay all reasonable legal fees and
related expenses (including the reasonable costs of experts, evidence and
counsel), when and as incurred by Employee, as a result of contesting or
disputing any termination of employment of Employee following a Change in
Control whether or not such contest or dispute is resolved in Employee's favor
but only if Employee was seeking in good faith to obtain or enforce any right or
benefit provided by this Agreement or by any other plan or arrangement
maintained by the Company under which Employee is or may be entitled to receive
benefits.
11. NOTICE. Any notice or other communication provided for or required by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or sent by certified mail, return receipt requested,
postage prepaid, addressed to the respective addresses last given by each party
to the other or to such other address as either party may have furnished to the
other in writing.
12. MODIFICATIONS, WAIVERS AND SURVIVAL OF OBLIGATIONS. No provision of
this Agreement may be modified, waived or discharged unless such modification,
waiver or discharge is agreed to in writing and signed by Employee and the
Company. A waiver of any condition or provision of this Agreement shall be
limited to the terms and conditions of such waiver and shall be not be construed
as a waiver of any similar or dissimilar provisions or condition at any time.
The obligations of the Company under Section 2 shall survive the expiration of
the term of this Agreement.
13. CLAIMS PROCEDURE. Any claim for benefits under this Agreement by
Employee shall be made in writing pursuant to the claims procedure stated in the
Plan.
14. GOVERNING LAW. The laws of Oregon shall be controlling in all matters
relating to this Agreement and the Plan to the extent not preempted by ERISA.
15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the parties hereto with respect to
the subject matter hereof.
17. ACTION BY COMPANY. Any action required of or permitted by Company
under this Agreement shall be by resolution of its Board of Directors, by
resolution of a duly authorized committee of its Board of Directors, or by a
person or persons authorized by resolutions of its Board of Directors or such
committee.
18. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
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19. NON-EXCLUSIVELY OF RIGHTS. Nothing in this Agreement shall prevent or
limit Employee's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by Company and for which Employee
may qualify, nor shall anything herein limit or reduce such rights as Employee
may have under any other agreements with Company. Amounts which are vested
benefits or which Employee is otherwise entitled to receive under any plan or
program of the Company shall be payable in accordance with such plan or program,
except as explicitly modified by this Agreement.
PHYSICIAN PARTNERS, INC.
By:
----------------------------------------
Its:
-------------------------------------
---------------------------------------------
Employee
SSN:
----------------------------------------
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APPENDIX G
DISSENTERS' RIGHTS
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
60.551 DEFINITIONS FOR 60.551 TO 60.594.--As used in ORS 60.551 to 60.594:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held IN A VOTING TRUST or a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under ORS 60.554 and who exercises that right when and in the
manner required by ORS 60.561 to 60.587.
(4) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder. (Last amended by Ch. 1040, L. '89, eff. 10-3-89.)
- ------------------------------
Ch. 1040, L. '89, eff. 10-3-89, added matter in italic.
.1 FAIR VALUE; USE OF MARKETABILITY AND MINORITY INTEREST DISCOUNTS.--In
action to determine fair value of dissenting shareholder's shares, trial court
correctly applied marketability discount, but should not have applied minority
interest discount. Marketability discount sufficiently reflected difference
between the shares' proportion of the enterprise value and their fair value. A
minority discount, however, would have penalized the dissenter for exercising
his statutory rights, while allowing corporation to buy his shares cheaply.
COLUMBIA MANAGEMENT CO V WYSS, 765 P2D 207 (CT APP 1988).
60.554 RIGHT TO DISSENT.--(1) Subject to subsection (2) of this section, a
shareholder is entitled to dissent from, and obtain payment of the fair value of
the shareholder's shares in the event of, any of the following corporate acts:
(a) Consummation of a plan of merger to which the corporation is a party
if shareholder approval is required for the merger by ORS 60.487 or the
articles of incorporation and the shareholder is entitled to vote on the
merger or if the corporation is a subsidiary that is merged with its parent
under ORS 60.491;
(b) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all or substantially all of
the property of the corporation other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale;
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(d) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities; or
(B) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired
for cash under ORS 60.141; or
(e) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under ORS 60.551 to 60.594 may not challenge the corporate
action creating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(3) Dissenters' rights shall not apply to the holders of shares of any class
or series if the shares of the class or series were registered on a national
securities exchange or (1) quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System as a National Market System issue on
the RECORD date (2) FOR the meeting of shareholders at which (3) THE CORPORATE
ACTION DESCRIBED IN SUBSECTION (1) OF THIS SECTION IS TO BE APPROVED OR ON THE
DATE A COPY OR SUMMARY OF THE PLAN OF MERGER IS MAILED TO SHAREHOLDERS UNDER ORS
60.491, UNLESS THE ARTICLES OF INCORPORATION OTHERWISE PROVIDE. (Last amended by
Ch. 403, L. '93, eff. 11-4-93.)
- ------------------------------
Ch. 403, L. '93, eff. 11-4-93, added matter in italic and deleted
(1) "prices were"; (2) "fixed to determine the shareholders entitled to vote
at"; and (3) "the amendment to the articles of incorporation, plan of merger,
exchange or proposed sale or exchange of property and assets is to be acted upon
unless the articles of incorporation of the corporation shall otherwise
provide".
60.557 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.--(1) A record shareholder
may assert dissenters' rights as to fewer than all the shares registered in the
shareholder's name only if the shareholder dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf the shareholder asserts
dissenters' rights. The rights of a partial dissenter under this subsection are
determined as if the shares regarding which the shareholder dissents and the
shareholder's other shares were registered in the names of different
shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held
on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of
which such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.
PROCEDURE FOR EXERCISE OF RIGHTS
60.561 NOTICE OF DISSENTERS' RIGHTS.--(1) If proposed corporate action
creating dissenters' rights under ORS 60.554 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under ORS 60.551 to 60.594 and be
accompanied by a copy of ORS 60.551 to 60.594.
(2) If corporate action creating dissenters' rights under ORS 60.554 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send the shareholders entitled to assert dissenters' rights the dissenters'
notice described in ORS 60.567.
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<PAGE>
60.564 NOTICE OF INTENT TO DEMAND PAYMENT.--(1) If proposed corporate
action creating dissenters' rights under ORS 60.554 is submitted to a vote at a
shareholders' meeting, a shareholder who wishes to assert dissenters' rights
shall deliver to the corporation before the vote is taken written notice of the
shareholder's intent to demand payment for the shareholder's shares if the
proposed action is effectuated and shall not vote such shares in favor of the
proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1) of
this section is not entitled to payment for the shareholder's shares under this
chapter.
60.567 DISSENTERS' NOTICE.--(1) If proposed corporate action creating
dissenters' rights under ORS 60.554 is authorized at a shareholders' meeting,
the corporation shall deliver a written dissenters' notice to all shareholders
who satisfied the requirements of ORS 60.564.
(2) The dissenters' notice shall be sent no later than 10 days after the
corporate action was taken, and shall:
(a) State where the payment demand shall be sent and where and when
certificates for certificated shares be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement of the terms of the proposed corporate action to news
media or to share holders and requires that the person asserting dissenters'
rights certify whether or not the person acquired beneficial ownership of
the shares before that date;
(d) Set a date by which the corporation must receive the payment demand.
This date may not be fewer than 30 nor more than 60 days after the date the
subsection (1) of this section notice is delivered; and
(e) Be accompanied by a copy of ORS 60.551 to 60.594.
60.571 DUTY TO DEMAND PAYMENT.--(1) A shareholder sent a dissenters' notice
described in ORS 60.567 must demand payment, certify whether the shareholder
acquired beneficial ownership of the shares before the date required to be set
forth in the dissenters' notice pursuant to ORS 60.567(2)(c), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's
shares under subsection (1) of this section retains all other rights of a
shareholder until these rights are canceled or modified by the taking of the
proposed corporate action.
(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
60.574 SHARE RESTRICTIONS.--(1) The corporation may restrict the transfer
of uncertificated shares from the date the demand for their payment is received
until the proposed corporate action is taken or the restrictions released under
ORS 60.581.
(2) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are canceled
or modified by the taking of the proposed corporate action.
60.577 PAYMENT.--(1) Except as provided in ORS 60.584, as soon as the
proposed corporate action is taken, or upon receipt of a payment demand, the
corporation shall pay each dissenter who complied with ORS 60.571, the amount
the corporation estimates to be the fair value of the shareholder's shares, plus
accrued interest.
G-3
<PAGE>
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than 16 months before the date of payment, an income
statement for that year and the latest available interim financial
statements, if any;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under ORS
60.587; and
(e) A copy of ORS 60.551 to 60.594. (Last amended by Ch. 579, L. '87.)
60.581 FAILURE TO TAKE ACTION.--(1) If the corporation does not take the
proposed action within 60 days after the date set for demanding payment and
depositing share certificates, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under ORS 60.567 and repeat the payment demand procedure.
60.584 AFTER-ACQUIRED SHARES.--(1) A corporation may elect to withhold
payment required by ORS 60.577 from a dissenter unless the dissenter was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders of
the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares plus accrued interest and shall pay
this amount to each dissenter who agrees to accept it in full satisfaction of
such demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares an explanation of how the interest was
calculated and a statement of the dissenter's right to demand payment under ORS
60.587.
60.587 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.--(1) A
dissenter may notify the corporation in writing of the dissenter's own estimate
of the fair value of the dissenter's shares and amount of interest due, and
demand payment of the dissenter's estimate, less any payment under ORS 60.577 or
reject the corporation's offer under ORS 60.584 and demand payment of the
dissenter's estimate of the fair value of the dissenter's shares and interest
due, if:
(a) The dissenter believes that the amount paid under ORS 60.577 or
offered under ORS 60.584 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under ORS 60.577 within 60
days after the date set for demanding payment; or
(c) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this section unless
the dissenter notifies the corporation of the dissenter's demand in writing
under subsection (1) of this section within 30 days after the corporation made
or offered payment for the dissenter's shares.
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<PAGE>
JUDICIAL APPRAISAL OF SHARES
60.591 COURT ACTION.--(1) If a demand for payment under ORS 60.587 remains
unsettled, the corporation shall commence a proceeding within 60 days after
receiving the payment demand under ORS 60587 and petition the court under
subsection (2) of this section to determine the fair value of the shares and
accrued interest. If the corporation does not commence the proceeding within the
60-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
(2) The corporation shall commence the proceeding in the circuit court of
the county where a corporation's principal office is located, or if the
principal office is not in this state, where the corporation's registered office
is located. If the corporation is a foreign corporation without a registered
offce in this state, it shall commence the proceeding in the county in this sue
where the registered office of the domestic corporation merged with or whose
shares were acquired by the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not resident of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares. All parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The jurisdiction of the circuit court in which the proceeding is
commenced under subsection (2) of this section is plenary and exclusive. The
court may appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the powers
described in the court order appointing them, or in any amendment to the order.
The dissenters are entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding is entitled to judgment
for:
(a) The amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the
corporation; or
(b) The fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under ORS 60384.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to counsel reasonable fees to be paid out of the amount awarded the
dissenters who were benefited.
60.594 COURT COSTS AND COUNSEL FEES.--(1) The court in an appraisal
proceeding commenced under ORS 60.591 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under ORS 60.587.
(2) The court may also assess the fees and expenses of counsel and expels of
the respective parties in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of ORS 60.561 to 60.587; or
(b) Against either the corporation or a dissenter in favor of any other
party, if the court finds that the party against whom the fees and expenses
art assessed acted arbitrarily, vexatiously or not in good faith with
respect to the rights provided by this chapter.
G-5
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C. SPECIAL MEETING OF SHAREHOLDERS DECEMBER
18, 1996
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby (1) acknowledges receipt of the Notice dated
November , 1996, of the Special Meeting of Shareholders of HealthFirst
Medical Group, P.C. (the "Company") to be held on December 18, 1996, and the
Joint Proxy
P
Statement/Prospectus, dated November , 1996, in connection therewith
(herein called the "Proxy Statement") and (2) constitutes and appoints
Matthew M. Shelley, M.D. and Vern R. Williams, M.D. and each of them, as his or
her attorneys and proxies, with full power of substitution and revocation
to each, for and in the name, place and stead of the undersigned, to
R
vote and act as designated below with respect to all of the Class A Shares
of the Company standing in name of the undersigned, or with respect to
which the undersigned is entitled to vote and act, at said meeting and any
adjournment(s) thereof.
O
1. APPROVAL OF THE HEALTHFIRST REORGANIZATION PROPOSAL as set forth in
the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
X
2. APPROVAL OF THE MERGER PROPOSAL as set forth in the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
Y
3. APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL as set forth
in the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
4. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ALL PROPOSALS
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE>
(CONTINUED FROM OTHER SIDE)
Proxy No.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1, 2 AND 3 ABOVE. A
VOTE TO "ABSTAIN" WILL HAVE THE SAME EFFECT AS VOTE "AGAINST" A PROPOSAL.
Dated: ______ , 1996
P
__________________________
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__________________________
PLEASE SIGN HERE
O
PLEASE DATE THIS
PROXY AND SIGN YOUR NAME EXACTLY
AS IT APPEARS
HEREON.
IF THERE IS MORE
THAN ONE OWNER, EACH SHOULD
SIGN.
X
WHEN SIGNING AS AN
AGENT, ATTORNEY, ADMINISTRATOR,
EXECUTOR, GUARDIAN,
OR TRUSTEE, PLEASE ADD YOUR
TITLE AS SUCH. IF
EXECUTED BY A CORPORATION, THE
PROXY
Y
SHOULD BE SIGNED BY
A DULY AUTHORIZED OFFICER WHO
SHOULD INDICATE
HIS/HER TITLE.
PLEASE DATE, SIGN
AND MAIL THIS PROXY CARD IN THE
ENCLOSED ENVELOPE.
NO POSTAGE IS REQUIRED IF MAILED
IN THE UNITED
STATES.
<PAGE>
THE CORVALLIS CLINIC, P.C. SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 19, 1996
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
CLASS A PREFERRED STOCK
The undersigned hereby (1) acknowledges receipt of the Notice dated
November , 1996, of the Special Meeting of Shareholders of The
Corvallis Clinic, P.C. (the "Company") to be held on December 19, 1996, and the
Joint Proxy Statement/
P
Prospectus, dated November , 1996, in connection therewith (herein
called the "Proxy Statement") and (2) constitutes and appoints David
Cutsforth, Jr., M.D. and David Kobriger and each of them, as his or her
attorneys and proxies, with full power of substitution and
revocation to each, for and in the name, place and stead of the undersigned, to
vote and act as designated
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below with respect to all of the shares of Class A Preferred Stock
of the Company standing in name of the undersigned, or with respect
to which the undersigned is entitled to vote and act, at said meeting and any
adjournment(s) thereof.
O
1. APPROVAL OF THE CORVALLIS CLINIC REORGANIZATION PROPOSAL as set
forth in the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
2. APPROVAL OF THE MERGER PROPOSAL as set forth in the Proxy
Statement.
X
FOR / / AGAINST / / ABSTAIN / /
3. APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL as set
forth in the Proxy Statement.
Y
FOR / / AGAINST / / ABSTAIN / /
4. In their discretion, the proxies are authorized to vote upon
such other business as may properly come before the meeting
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ALL
PROPOSALS
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE>
(CONTINUED FROM OTHER SIDE)
Proxy No.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1, 2, AND 3 ABOVE. A
VOTE TO "ABSTAIN" WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST" A PROPOSAL.
Dated: _______, 1996
P
__________________________
R
__________________________
PLEASE SIGN HERE
O
PLEASE DATE THIS
PROXY AND SIGN YOUR NAME EXACTLY
AS IT APPEARS
HEREON.
X
IF THERE IS MORE
THAN ONE OWNER, EACH SHOULD
SIGN. WHEN SIGNING
AS AN AGENT, ATTORNEY,
ADMINISTRATOR,
EXECUTOR, GUARDIAN,
OR TRUSTEE, PLEASE ADD YOUR
TITLE
Y
AS SUCH. IF EXECUTED
BY A CORPORATION, THE PROXY
SHOULD BE SIGNED BY
A DULY AUTHORIZED OFFICER WHO
SHOULD INDICATE
HIS/HER TITLE.
PLEASE DATE, SIGN
AND MAIL THIS PROXY CARD IN THE
ENCLOSED ENVELOPE.
NO POSTAGE IS REQUIRED IF MAILED
IN THE UNITED
STATES.
<PAGE>
THE CORVALLIS CLINIC, P.C. SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 19, 1996
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
CLASS B COMMON STOCK
The undersigned hereby (1) acknowledges receipt of the Notice dated
November , 1996, of the Special Meeting of Shareholders of The
Corvallis Clinic, P.C. (the "Company") to be held on December 19, 1996, and the
Joint Proxy Statement/
P
Prospectus, dated November , 1996, in connection therewith (herein
called the "Proxy Statement") and (2) constitutes and appoints David
Cutsforth, Jr., M.D. and David Kobriger and each of them, as his or her
attorneys and proxies, with full power of substitution and
revocation to each, for and in the name, place and stead of the undersigned, to
vote and act as designated
R
below with respect to all of the shares of Class B Common Stock of
the Company standing in name of the undersigned, or with respect to
which the undersigned is entitled to vote and act, at said meeting and any
adjournment(s) thereof.
O
1. APPROVAL OF THE CORVALLIS CLINIC REORGANIZATION PROPOSAL as set
forth in the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
2. APPROVAL OF THE MERGER PROPOSAL as set forth in the Proxy
Statement.
X
FOR / / AGAINST / / ABSTAIN / /
3. APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL as set
forth in the Proxy Statement.
Y
FOR / / AGAINST / / ABSTAIN / /
4. In their discretion, the proxies are authorized to vote upon
such other business as may properly come before the meeting
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ALL
PROPOSALS
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE>
(CONTINUED FROM OTHER SIDE)
Proxy No.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1, 2, AND 3 ABOVE. A
VOTE TO "ABSTAIN" WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST" A PROPOSAL.
Dated: _______, 1996
P
__________________________
R
__________________________
PLEASE SIGN HERE
O
PLEASE DATE THIS
PROXY AND SIGN YOUR NAME EXACTLY
AS IT APPEARS
HEREON.
X
IF THERE IS MORE
THAN ONE OWNER, EACH SHOULD
SIGN. WHEN SIGNING
AS AN AGENT, ATTORNEY,
ADMINISTRATOR,
EXECUTOR, GUARDIAN,
OR TRUSTEE, PLEASE ADD YOUR
TITLE
Y
AS SUCH. IF EXECUTED
BY A CORPORATION, THE PROXY
SHOULD BE SIGNED BY
A DULY AUTHORIZED OFFICER WHO
SHOULD INDICATE
HIS/HER TITLE.
PLEASE DATE, SIGN
AND MAIL THIS PROXY CARD IN THE
ENCLOSED ENVELOPE.
NO POSTAGE IS REQUIRED IF MAILED
IN THE UNITED
STATES.
<PAGE>
MEDFORD CLINIC, P.C. SPECIAL MEETING OF SHAREHOLDERS DECEMBER 16, 1996
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby (1) acknowledges receipt of the Notice dated
November , 1996, of the Special Meeting of Shareholders of Medford
Clinic, P.C. (the "Company") to be held on December 16, 1996, and the Joint
Proxy Statement/
P
Prospectius, dated November , 1996, in connection therewith (herein
called the "Proxy Statement") and (2) constitutes and appoints Steven
Schnugg, M.D. and Jon Ness and each of them, as his or her attorneys and
proxies, with full power of substitution and revocation to each, for and
in the name, place and stead of the undersigned, to vote and act as designated
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below with respect to all of the shares of Common Stock of the Company
standing in name of the undersigned, or with respect to which the
undersigned is entitled to vote and act, at said meeting and any adjournment(s)
thereof.
O
FOR / / AGAINST / / ABSTAIN / /
2. APPROVAL OF THE MERGER PROPOSAL as set forth in the Proxy Statement.
X
FOR / / AGAINST / / ABSTAIN / /
3. APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL as set forth
in the Proxy Statement.
Y
1. APPROVAL OF THE MEDFORD CLINIC REORGANIZATION PROPOSAL as set forth in
the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
4. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ALL PROPOSALS
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE>
(CONTINUED FROM OTHER SIDE)
Proxy No.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1, 2 AND 3 ABOVE. A
VOTE TO "ABSTAIN" WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST" A PROPOSAL.
Dated: ______ , 1996
P
__________________________
R
__________________________
PLEASE SIGN HERE
O
PLEASE DATE THIS
PROXY AND SIGN YOUR NAME EXACTLY
AS IT APPEARS
HEREON.
IF THERE IS MORE
THAN ONE OWNER, EACH SHOULD
SIGN.
X
WHEN SIGNING AS AN
AGENT, ATTORNEY, ADMINISTRATOR,
EXECUTOR, GUARDIAN,
OR TRUSTEE, PLEASE ADD YOUR
TITLE AS SUCH. IF
EXECUTED BY A CORPORATION, THE
PROXY
Y
SHOULD BE SIGNED BY
A DULY AUTHORIZED OFFICER WHO
SHOULD INDICATE
HIS/HER TITLE.
PLEASE DATE, SIGN
AND MAIL THIS PROXY CARD IN THE
ENCLOSED ENVELOPE.
NO POSTAGE IS REQUIRED IF MAILED
IN THE UNITED
STATES.
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
PHYSICIAN PARTNERS, INC.
------------------------------------------
PHYSICIAN PARTNERS, INC., A CORPORATION ORGANIZED AND EXISTING UNDER THE
LAWS OF THE STATE OF DELAWARE, HEREBY CERTIFIES AS FOLLOWS:
1. THE ORIGINAL CERTIFICATE OF INCORPORATION WAS FILED WITH THE SECRETARY
OF STATE OF THE STATE OF DELAWARE ON JUNE 20, 1996.
2. THIS CORPORATION HAS NOT RECEIVED ANY PAYMENT FOR ANY OF ITS STOCK.
3. THIS AMENDED AND RESTATED CERTIFICATE OF INCORPORATION WAS DULY
ADOPTED IN ACCORDANCE WITH THE PROVISIONS OF SECTIONS 241 AND 245 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE.
4. THE CERTIFICATE OF INCORPORATION OF PHYSICIAN PARTNERS, INC. IS HEREBY
AMENDED AND RESTATED TO READ IN ITS ENTIRETY AS FOLLOWS:
ARTICLE I
NAME
The name of this corporation (the "Corporation") is Physician Partners,
Inc.
ARTICLE II
REGISTERED OFFICE
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, in
the County of New Castle. The name of the Corporation's registered agent at
such address is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose for which the Corporation is organized is to engage in any
lawful act or activity for which corporations may be
<PAGE>
organized under the General Corporation Law of the State of Delaware (the
"Delaware Law").
ARTICLE IV
AUTHORIZED CAPITAL STOCK
SECTION 1. The total number of shares of all classes of capital stock
which the Corporation shall have the authority to issue is 100,000,000 shares,
consisting of: (a) 50,000,000 shares of Common Stock, par value $0.01 per share
("Common Stock"), of which 20,000,000 shares are designated as Class A Common
Stock, par value $0.01 par value ("Class A Common Stock"), and 30,000,000 shares
of which are designated as Class B Common Stock, par value $0.01 per share
("Class B Common Stock"), and (b) 50,000,000 shares of Preferred Stock, par
value $0.01 per share ("Preferred Stock").
SECTION 2. The powers, preferences, rights, qualifications, limitations
and restrictions relating to each class of capital stock of the Corporation are
as follows:
(A) CLASS A COMMON STOCK
(1) DIVIDENDS. Subject to the provisions of the Delaware Law and the
rights of holders of Preferred Stock and any other series of capital stock then
outstanding having a preference as to dividends over Class A Common Stock,
holders of Class A Common Stock shall be entitled to receive such dividends and
other distributions in cash, stock or property of the Corporation as may be
declared thereon from time to time by the Board of Directors of the Corporation
(the "Board of Directors") out of the assets or funds of the Corporation legally
available therefor.
(2) VOTING. At every meeting of stockholders (the "Stockholders") of
the Corporation, every holder of Class A Common Stock shall be entitled to one
vote in person or by proxy for each share of Class A Common Stock standing in
such Stockholder's name on the transfer books of the Corporation.
(3) RESTRICTION ON TRANSFER. No holder of Class A Common Stock may
sell, assign, transfer, pledge or otherwise encumber or dispose of any share of
Class A Common Stock or of any interest therein prior to the fifth anniversary
of the date of the issuance (the "Issuance Date") of such share to such holder.
(4) CONVERSION. (a) Upon the transfer of any whole number or all of
the shares of Class A Common Stock to a third party unaffiliated with the
original holder thereof, the transferred shares of Class A Common Stock shall
convert into fully paid and nonassessable shares of Class B Common Stock at the
rate of one share of Class B Common Stock for each share of Class A Common Stock
so converted. The conversion shall be effected at the time the holders of Class
A Common Stock surrender such
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holders' certificates for Class A Common Stock to be transferred, duly endorsed,
at the office of the Corporation or any transfer agent for Class A Common Stock.
Promptly thereafter, the Corporation shall issue and deliver to the assignee, a
certificate or certificates for the number of shares of Class B Common Stock to
which the assignee shall be entitled. The conversion shall be deemed to have
been made at the close of business on the date of the surrender and the person
or persons entitled to receive shares of Class B Common Stock issuable on the
conversion shall be treated for all purposes as the record holder or holders of
the shares of Class B Common Stock on that date.
(b) The initial number of shares of Class B Common Stock into
which shares of Class A Common Stock are convertible shall be subject to
adjustment from time to time, after the date hereof, in case the Corporation
shall (i) pay a dividend in, or make distribution of, shares of Class B Common
Stock, (ii) subdivide its outstanding shares of Class B Common Stock into a
greater number of such shares, (iii) combine its outstanding shares of Class B
Common Stock into a smaller number of such shares or (iv) consolidate or merge
with or into another corporation (other than a consolidation or merger which
does not result in any reclassification or change of Class A Common Stock), or
sell or convey all or substantially all of the Corporation's assets in their
entirety to another corporation. The total number of shares of Class B Common
Stock and the number of shares of Class A Common Stock convertible into Class B
Common Stock shall be adjusted so that the holder of Class A Common Stock
thereafter surrendered for conversion shall be entitled to receive the number of
shares of Class B Common Stock which it would have been entitled to receive
immediately following the happening of any of the events described above had
such Class A Common Stock been converted immediately following the happening of
such event. Any adjustment made pursuant to this Section 2(A)(4)(b) shall, in
the case of a stock dividend or distribution, become effective as of the record
date therefor and, in the case of a subdivision, combination, grant, conveyance
or merger, be made as of the effective thereof.
(5) DILUTION. No holder of Class A Common Stock shall have any right
to maintain such holder's proportionate share of ownership of the Corporation or
other rights to purchase any newly issued and offered shares of Class A Common
Stock or Class B Common Stock, and each holder of Class A Common Stock hereby
expressly acknowledges that any newly issued and offered shares may dilute the
percentage of total number of shares of Class A Common Stock held by such
holder.
(6) REGISTRATION RIGHT. (a) A holder of Class A Common Stock shall
have the right to elect, at any time after the second anniversary of the
Issuance Date to require the Corporation to include up to 20 percent of the
shares of Class A Common Stock held by such holder (the "Registrable Shares") in
a registration statement ("Registration Statement") relating to any proposed
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registered public offering of Common Stock under which the Corporation receives
proceeds in excess of $30 million (net of underwriters' commissions and
discounts) ("Registered Public Offering"). If, at any time after the second
anniversary of the Issuance Date, the Corporation shall determine to register
any of its securities (any such registration being referred to herein as a
"Registration") under the Securities Act of 1933, as amended (the "Securities
Act"), in connection with any Registered Public Offering, the Corporation shall
deliver to each holder of Class A Common Stock a written notice with respect
thereto at least 30 days prior to the filing with the Securities Exchange
Commission of the Registration Statement relating to such Registered Public
Offering. Any holder of Class A Common Stock that elects to require the
Corporation to include such holder of Registrable Shares in the Registration
Statement shall, within 30 days following the receipt of a written notice with
respect to a Registration from the Corporation, deliver to the Corporation a
written notice, which notice shall indicate (i) such holder's intent to include
such Registrable Shares in the Registration Statement and (ii) the total number
of such holder's Registrable Shares. In addition, as a condition to any
Registered Public Offering involving such Registrable Shares, such holder of
Class A Common Stock shall (y) enter into an underwriting agreement in customary
form with the managing underwriter selected by the Corporation with respect to
such Registered Public Offering (the "Managing Underwriter") and perform its
obligations under such underwriting agreement and (z) furnish to the Corporation
such information as the Corporation may request in writing and as shall be
required in connection with such Registration Statement.
(b) Notwithstanding the provisions of paragraph (a) of this
Section 2(A)(6), if the Managing Underwriter determines, for any reason, that
the number of Registrable Shares to be included in such Registered Public
Offering must be reduced, the Managing Underwriter may reduce the number of such
Registrable Shares (an "Underwriter's Reduction") by, first, reducing the number
of Registrable Shares owned by Non-Eligible Investors (as such term is
hereinafter defined) to be included in such Registered Public Offering on a pro
rata basis in accordance with each such Non-Eligible Investor's percentage
ownership in all such Registrable Shares owned by Non-Eligible Investors and, if
the exclusion of all Registrable Shares owned by Non-Eligible Investors is
insufficient to meet the Underwriter's Reduction, then by reducing the number of
Registrable Shares owned by holders of Class A Common Stocks other than
Non-Eligible Investors to be included in such Registration Statement on a pro
rata basis in accordance with all such Registrable Shares owned by such holders
of Class A Common Stocks. For purposes hereof, the term "Non-Eligible Investor"
means any Stockholder who is not: (i) an employee or member of the Board of
Directors or an entity (an "Affiliated Entity") with which the Corporation has
entered into a practice management agreement, (ii) a Stockholder who, pursuant
to such Stockholder's employment contract with the Corporation or any Affiliated
Entity, has retired (A) after more than 20 years of
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employment by the Corporation or such Affiliated Entity, with full credit given
for the period employment with such Affiliated Entity, or (B) at age 62 or
older, (iii) a Stockholder, or such Stockholder's representative, as the case
may be, whose employment contract with the Corporation or any Affiliated Entity
was terminated as a result of death or disability or (iv) any person or entity
that has received shares of Common Stock from the Corporation in connection with
any acquisition by the Corporation of any stock or assets of another entity.
(c) All expenses incurred in connection with any Registration
Statement, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Corporation, blue sky fees and expenses, and the expense of any special
audits incident to or required by any such registration shall be borne by the
Corporation; PROVIDED, HOWEVER, that unless otherwise stated, all selling
expenses relating to Registrable Shares, including, without limitation, all
underwriting discounts, selling commissions and stock transfer taxes applicable
thereto and all fees and disbursements of counsel for any holder of Class A
Common Stock, shall be borne by each holder of Class A Common Stock, pro rata on
the basis of the number of Registrable Shares included in the Registration
Statement.
(d) In the case of each Registered Public Offering, the
Corporation will keep each holder of Class A Common Stock advised in writing as
to the initiation and completion of such Registered Public Offering.
Additionally, the Corporation will, at its own expense:
(i) Furnish to such holder of Class A Common Stock, such
numbers of copies of the prospectus (including the preliminary prospectus)
that is part of the Registration Statement in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of the
Registrable Shares owned by such holder; and
(ii) Notify each such holder at any time when a prospectus
relating to the Registered Public Offering is required to be delivered
under the Securities Act, of the occurrence of any event as a result of
which the prospectus included in the Registration Statement, as then in
effect, includes an untrue statement of a material fact or omits to make
the statements therein not misleading in the light of the circumstances
then existing.
(e) In connection with any Registered Public Offering:
(i) The Corporation will indemnify each such holder, each
of its officers and directors and partners, and each person "controlling"
such holder (within the meaning of
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Section 15 of the Securities Act), if any, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including
any of the foregoing incurred in settlement of any litigation, commenced or
threatened, arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in the Registration
Statement or in any prospectus, offering circular or other similar
document, or any amendment or supplement thereto, incident to any such
Registration Statement, or based on any omission (or alleged omission) to
therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they
were made, not misleading, or any violation by the Corporation of the
Securities Act applicable to the Corporation in connection with any such
Registration Statement, and the Corporation will reimburse each such
holder, each of its officers and directors and partners, and each person
controlling such holder, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, provided that the Corporation
will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in
reliance upon and in conformity with written information furnished to the
Corporation by an instrument duly executed by such holder or a controlling
person thereof and stated to be specifically for use therein.
(ii) Each such holder will indemnify the Corporation, each
of its directors and officers, each person who controls the Corporation or
such "underwriter" (within the meaning of Section 15 of the Securities
Act), and each such other holder, each of its officers and directors and
partners and each person controlling such "Holder" (within the meaning of
Section 15 of the Securities Act), against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained
in any such Registration Statement, prospectus, offering circular or other
similar document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading, and will reimburse the Corporation, such holder, such
directors, officers, partners, persons, underwriters or control persons for
any legal or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such
untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such Registration Statement, prospectus, offering
circular or
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other document in reliance upon and in conformity with written information
furnished to the Corporation by an instrument duly executed by such holder
and stated to be specifically for use therein.
(iii) Each party entitled to indemnification under this
Section 2(A)(6)(e) (each an "Indemnified Party") shall give notice to any
party required to provide indemnification (an "Indemnifying Party")
promptly after such Indemnified Party has actual knowledge of any claim as
to which indemnity may be sought, and each Indemnified Party shall permit
the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; PROVIDED, HOWEVER, that (A) counsel for the
Indemnifying Party, who shall conduct the defense of any such claim or
litigation, shall be approved by the Indemnified Party (whose approval
shall not unreasonably be withheld) and (B) the Indemnified Party may
participate in such defense at such Indemnified Party's expense, and
PROVIDED, FURTHER, that the failure of any Indemnified Party to give notice
as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 2(A)(6)(e) except to the extent that the
failure to give such notice is materially prejudicial to an Indemnifying
Party's ability to defend such action, and PROVIDED, FURTHER, that the
Indemnifying Party shall not assume the defense for matters as to which
there is a conflict of interest or separate and different defenses but
shall continue to be liable for the costs of such defense. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with
the consent of each Indemnified Party, consent to entry of any judgment or
enter into any settlement that does not include as an unconditional term
thereof, the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
(f) Notwithstanding anything to the contrary herein, the
Corporation shall have the right to terminate or withdraw any Registration
Statement initiated by the Corporation prior to the effectiveness of such
Registration Statement, whether or not any holder of Class A Common Stock has
elected to include its Registrable Shares in such Registration Statement.
(7) REPURCHASE RIGHT. (a) The Corporation shall have the right, but
not the obligation, to repurchase all or any portion of shares of Class A Common
Stock held by a Stockholder in the event such Stockholder ceases to be an
employee or member of the Board of Directors of the Corporation or of an
Affiliated Entity, for reasons other than death, disability or retirement, at
the purchase price equal to (i) equal to the average closing sale price of the
Common Stock during the four-month period immediately preceding the date of the
repurchase by the Corporation, if the Common Stock was publicly traded
throughout such four-month period or (ii) otherwise, equal to the fair market
value of the Common
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Stock as of December 31st of the year immediately preceding the date of the
repurchase by the Corporation, as determined by a nationally-recognized
independent valuation firm or investment bank with experience in valuing
privately-held physician practice management companies or other companies
engaged in similar businesses (the "Valuation Firm"); PROVIDED, HOWEVER, that,
upon the occurrence of a Noncompetition Breaching Event (as such term is
hereinafter defined), such purchase price shall be equal to the lesser of (A)
the Original Issuance Price (as such term is hereinafter defined) of such shares
of Class A Common Stock as are being so repurchased and (B) (1) the average
closing sales price of the Class A Common Stock during the four-month period
immediately preceding the date of the occurrence of such Noncompetition
Breaching Event, if the Class A Common Stock was publicly traded throughout such
four-month period, or (2) otherwise, the fair market value of such shares as of
December 31st of the year immediately preceding the date of the occurrence of
such Noncompetition Breaching Event as determined by a Valuation Firm.
(b) For purposes hereof, (i) the term "Original Issuance Price"
shall mean the fair market value of such shares of Class A Common Stock as are
being repurchased by the Corporation from a Stockholder at the time of issuance
of such shares to such Stockholder, as determined by the Valuation Firm and (ii)
the term "Noncompetition Breaching Event" shall refer to a holder of Class A
Common Stock, either jointly or individually, directly or indirectly, whether as
an employee, officer, director, agent, consultant or otherwise, during the
period ending two years after termination of employment thereof with the
Corporation or any Affiliated Entity (A) competing with the Corporation or an
Affiliated Entity or any of the facilities (collectively, the "Facilities")
operated by the Corporation or an Affiliated Entity at the time of such
termination within a 25-mile radius of any such Facility (referred to herein as
the "Restricted Area"), (B) owning, managing, operating, joining, controlling,
advising, consulting with, providing services to, or being employed by or
participating in the ownership, operation, management or control (other than as
a stockholder owning less than five percent of the capital stock of a company
the capital stock of which is publicly traded on a national securities exchange)
of any entity or business engaged in the provision of services provided by the
Corporation or any Affiliate or at any of the Facilities (referred to herein as
a "Competing Business") within the Restricted Area or (C) advising, assisting,
consulting with, leasing or selling real property to or aiding in the
establishment or operation of a Competing Business in the Restricted Area.
(c) The repurchase by the Corporation of any Class A Common
Stock from a Stockholder pursuant to this Section 2(A)(7) shall be consummated
at a closing (the "Corporation Repurchase Closing"), which, unless otherwise
agreed upon by the Corporation and such Stockholder, shall take place at the
principal office of the Corporation at 10:00 a.m. on the 20th day next following
(or,
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if such 20th day falls on a Saturday, Sunday or legal holiday, the next business
day thereafter) the date of the written notice by the Corporation to such
Stockholder of its election to repurchase such shares. At the Corporation
Repurchase Closing (i) such Stockholder shall deliver to the Corporation all
certificates evidencing the shares of Class A Common Stock being repurchased by
the Corporation, duly endorsed for transfer, free and clear of all liens and
encumbrances, with no further act required to be taken by the Corporation and
(ii) the Corporation shall pay to such Stockholder cash in an amount equal to
the purchase price of such Common Shares being repurchased by the Corporation;
PROVIDED, HOWEVER, that in the case of payment of the purchase price in
connection with the repurchase following the Noncompetition Breaching Event,
instead of paying the full amount thereof in cash, the Corporation may, at its
sole option, deliver to such Stockholder an amount equal to 10 percent of such
purchase price in cash and a 10-year installment note in the principal amount
equal to the balance of the amount of such purchase price, bearing interest at
the prime rate of interest, as announced or in effect at United States National
Bank of Oregon, plus one percent, for the principal amount of such installment
note.
(B) CLASS B COMMON STOCK
(1) DIVIDENDS. Subject to the provisions of the Delaware Law and the
rights of holders of Preferred Stock and any other series of capital stock then
outstanding having a preference as to dividends over Class B Common Stock,
holders of Class B Common Stock shall be entitled to receive such dividends and
other distributions in cash, stock or property of the Corporation as may be
declared on Class A Common Stock from time to time by the Board of Directors out
of the assets or funds of the Corporation legally available therefor.
(2) VOTING. At every meeting of Stockholders of the Corporation,
every holder of Class B Common Stock shall be entitled to one vote in person or
by proxy for each share of Class B Common Stock standing in such Stockholder's
name on the transfer books of the Corporation.
(3) DILUTION. No holder of Class B Common Stock shall have any right
to maintain such holder's proportionate share of ownership of the Corporation or
other rights to purchase any newly issued and offered shares of Class A Common
Stock or Class B Common Stock, and each holder of Class B Common Stock hereby
expressly acknowledges that any newly issued and offered shares may dilute the
percentage of total number of shares of Class B Common Stock held by such
holder.
(C) SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
(1) DESIGNATION. The shares of a series of Preferred Stock shall be
designated as "Series A Junior Participating
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Preferred Stock" and the number of shares constituting such series shall be
200,000.
(2) DIVIDENDS. (a) Subject to the prior and superior rights of the
holders of any shares of any series of Preferred Stock issued from time to time
ranking prior and superior to the shares of Series A Junior Participating
Preferred Stock with respect to dividends, the holders of shares of Series A
Junior Participating Preferred Stock shall be entitled to receive, when, as and
if declared by the Board of Directors out of funds legally available therefor,
quarterly dividends payable in cash on the 15th day of January, April, July and
October in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the initial issuance of a share of Series A Junior Participating Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (i) $1.00 or (ii) subject to the provision for adjustment hereinafter set
forth, the sum of (A) the product of 1,000 multiplied by the aggregate per share
amount of all cash dividends and (B) the product of 1,000 multiplied by the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions (other than a dividend payable in shares of Class A Common Stock
or a subdivision of the outstanding shares of Class A Common Stock (by
reclassification or otherwise)), declared on Common Stock since the immediately
preceding Quarterly Dividend Payment Date or, with respect to such first
Quarterly Dividend Payment Date, since the initial issuance of any share of
Series A Junior Participating Preferred Stock; PROVIDED, HOWEVER, that, in the
event the Corporation shall, at any time after July 31, 1996 (the "Rights
Declaration Date"), declare any dividend on Common Stock payable in shares of
Common Stock, subdivide outstanding Common Stock or combine outstanding Common
Stock into a smaller number of shares, then, in each such case, the amount to
which holders of shares of Series A Junior Participating Preferred Stock were
entitled immediately prior to such event under clause (ii) of this Section
2(C)(2)(a) shall be adjusted by multiplying such amount by a fraction, the
numerator of which shall be the number of shares of Class A Common Stock
outstanding immediately after such event and the denominator of which shall be
the number of shares of Class A Common Stock that were outstanding immediately
prior to such event.
(b) The Corporation shall declare a dividend or distribution on
Series A Junior Participating Preferred Stock as provided in paragraph (a) of
this Section 2(C)(2) immediately after the Corporation declares a dividend or
distribution on Common Stock (other than a dividend payable in shares of Common
Stock), PROVIDED that, in the event no dividend or distribution shall have been
declared on Common Stock during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Divided Payment Date, a dividend
of $1.00 per share (as such amount may be adjusted pursuant to paragraph (a) of
this Section 2(C)(2)) on Series A Junior Participating Preferred Stock
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shall nevertheless be payable on such subsequent Quarterly Dividend Payment
Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Junior Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issuance of such
shares of Series A Junior Participating Preferred Stock, unless (i) such date of
issuance of such shares is prior to the record date for the first Quarterly
Dividend Payment Date (in which case dividends on such shares shall begin to
accrue from such date of issuance of such shares) or (ii) such date of issuance
is a Quarterly Dividend Payment Date or a date after the record date for the
determination of holders of shares of Series A Junior Participating Preferred
Stock entitled to receive quarterly dividend payable on such Quarterly Dividend
Payment Date but prior to such Quarterly Dividend Payment Date (in either of
which events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date). Accrued but unpaid dividends shall not bear
interest. Dividends paid on shares of Series A Junior Participating Preferred
Stock in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board
of Directors may fix a record date for the determination of holders of shares of
Series A Junior Participating Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than 60 days prior to the date fixed for such payment.
(3) VOTING RIGHTS. (a) Subject to the provision for adjustment
hereinafter set forth, each share of Series A Junior Participating Preferred
Stock shall entitle the holder thereof to 1,000 votes on all matters submitted
to a vote of the Stockholders of the Corporation. In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on
Class A Common Stock payable in shares of Class A Common Stock, (ii) subdivide
the outstanding Class A Common Stock or (iii) combine the outstanding Class A
Common Stock into a smaller number of shares, then in each such case the number
of votes per share to which holders of shares of Series A Junior Participating
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction the numerator of which shall be the
number of shares of Class A Common Stock outstanding immediately after such
event and the denominator of which shall be the number of shares of Class A
Common Stock that were outstanding immediately prior to such event.
(b) Except as otherwise provided herein or by law, the holders
of shares of Series A Junior Participating Preferred Stock and the holders of
shares of Class A Common Stock shall vote together as one class on all matters
submitted to a vote of Stockholders of the Corporation.
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(c)(i) If at any time dividends on any Series A Junior
Participating Preferred Stock shall be in arrears in an amount equal to six
quarterly dividends thereon, the occurrence of such contingency shall mark the
beginning of a period (referred to herein as a "default period") which shall
extend until such time as all accrued and unpaid dividends for all previous
quarterly dividend periods and for the then-current quarterly dividend period on
all shares of Series A Junior Participating Preferred Stock then outstanding
shall have been declared and paid or set apart for payment. During each default
period, all holders of Series A Junior Participating Preferred Stock with
dividends in arrears in an amount equal to six quarterly dividends thereon,
voting as a class, shall have the right to elect two directors ("Directors") of
the Corporation.
(ii) During any default period, voting rights of the holders
of Series A Junior Participating Preferred Stock may be exercised initially
at a special meeting of the Stockholders of the Corporation called pursuant
to subparagraph (iii) of this Section 2(C)(3)(c) or at any annual meeting
of the Stockholders of the Corporation, and thereafter at annual meetings
of the Stockholders of the Corporation, provided that such voting rights
shall not be exercised unless the holders of shares constituting at least
10 percent of the then-outstanding shares of Series A Junior Participating
Preferred Stock shall be present in person or by proxy. The absence of a
quorum of the holders of Class A Common Stock shall not affect the exercise
by the holders of Series A Junior Participating Preferred Stock of such
voting rights. At any meeting of the Stockholders of the Corporation at
which the holders of Series A Junior Participating Preferred Stock shall
exercise such voting rights initially during an existing default period,
such Stockholders shall have the right, voting as a class, to elect up to
two Directors to fill such vacancies, if any, in the Board of Directors as
may then exist or, if such rights are exercised at an annual meeting of the
Stockholders of the Corporation, to elect two Directors. If the number of
Directors which may be so elected at any special meeting of the
Stockholders of the Corporation is less than two, the holders of Series A
Junior Participating Preferred Stock shall have the right to make such
increase in the number of Directors as shall be necessary to permit the
election by them of two Directors. After the holders of Series A Junior
Participating Preferred Stock shall have exercised their right to elect
Directors in any default period and during the continuance of such period,
the number of Directors shall not be increased or decreased except by vote
of the holders of Series A Junior Participating Preferred Stock as herein
provided or pursuant to the rights of any equity securities ranking senior
to or pari passu with Series A Junior Participating Preferred Stock.
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(iii) Unless the holders of Series A Junior Participating
Preferred Stock shall, during an existing default period, have previously
exercised their rights to elect Directors, the Board of Directors may
order, or any Stockholder or Stockholders owning in the aggregate not less
than 10 percent of the aggregate number of shares of Series A Junior
Participating Preferred Stock outstanding, may request, the calling of a
special meeting of the holders of Series A Junior Participating Preferred
Stock, which meeting shall thereupon be called by the President, a Vice
President or the Secretary of the Corporation. Notice of any such meeting
and of any annual meeting of the Stockholders of the Corporation at which
holders of Series A Junior Participating Preferred Stock are entitled to
vote pursuant to this Section 2(C)(3)(c)(iii) shall be given to each holder
of record of Series A Junior Participating Preferred Stock by mailing a
copy of such notice to him or her at his or her last address as the same
appears on the books of the Corporation. Such meeting shall be called for
a time not earlier than 20 days and not later than 60 days after such order
or request or in default of the calling of such meeting within 60 days
after such order or request, such meeting may be called on similar notice
by any Stockholder or Stockholders owning in the aggregate not less than 10
percent of the aggregate number of shares of Series A Junior Participating
Preferred Stock outstanding. Notwithstanding the provisions of this
Section 2(C)(3)(c)(iii), no such special meeting shall be called during the
period within 60 days immediately preceding the date fixed for the next
annual meeting of the Stockholders of the Corporation.
(iv) In any default period, the holders of Class A Common
Stock, and other classes of stock of the Corporation if applicable, shall
continue to be entitled to elect the whole number of Directors until the
holders of Series A Junior Participating Preferred Stock shall have
exercised their right to elect two Directors voting as a class, after the
exercise of which right (A) the Directors so elected by the holders of
Series A Junior Participating Preferred Stock shall continue in office
until their successors shall have been elected by such holders or until the
expiration of the default period and (B) any vacancy in the Board of
Directors may (except as provided in subparagraph (ii) of this Section
2(C)(3)(c)) be filled by vote of a majority of the remaining Directors
theretofore elected by the holders of the class of stock which elected the
Director whose office shall have become vacant. References in this Section
2(C)(3)(c) to Directors elected by the holders of a particular class of
stock shall include Directors elected by such Directors to fill vacancies
as provided in clause (B) of the foregoing sentence.
(v) Immediately upon the expiration of a default period,
(A) the right of the holders of Series A
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Junior Participating Preferred Stock as a class to elect Directors shall
cease, (B) the term of any Directors elected by the holders of Series A
Junior Participating Preferred Stock as a class shall terminate and (C) the
number of Directors shall be such number as may be provided for in this
Certificate of Incorporation or Bylaws irrespective of any increase made
pursuant to the provisions of subparagraph (ii) of this Section 2(C)(3)(c)
(such number being subject, however, to change thereafter in any manner
provided by law or in this Certificate of Incorporation or Bylaws). Any
vacancies in the Board of Directors effected by the provisions of clauses
(B) and (C) in the preceding sentence may be filled by a majority of the
remaining Directors.
(d) Except as set forth herein, holders of Series A Junior
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Class A Common Stock as set forth herein) for taking any
corporate action.
(4) CERTAIN RESTRICTIONS. (a) Whenever quarterly dividends or other
dividends or distributions payable on Series A Junior Participating Preferred
Stock as provided in Section 2(c)(2) are in arrears, thereafter and until all
accrued and unpaid dividends and distributions, whether or not declared, on
shares of Series A Junior Participating Preferred Stock outstanding shall have
been paid in full, the Corporation shall not
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to Series A Junior
Participating Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with Series A
Junior Participating Preferred Stock, except dividends paid ratably on
Series A Junior Participating Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with Series A
Junior Participating Preferred Stock, provided that the Corporation may at
any time redeem, purchase or otherwise acquire shares of any such parity
stock in exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution,
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liquidation or winding up) to Series A Junior Participating Preferred
Stock; or
(iv) purchase or otherwise acquire for consideration any
shares of Series A Junior Participating Preferred Stock, or any shares of
stock ranking on a parity with Series A Junior Participating Preferred
Stock, except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective
series or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this Section 2(C)(4), purchase or otherwise acquire such shares at such time and
in such manner.
(5) REQUIRED SHARES. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Series A Junior Participating Preferred Stock and may be
reissued as part of a new series of Series A Junior Participating Preferred
Stock to be created by resolution or resolutions of the Board of Directors,
subject to the conditions and restrictions on issuance set forth herein.
(6) LIQUIDATION, DISSOLUTION AND WINDING UP. (a) Upon any
liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Participating Preferred Stock
shall have received $1,000 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series A Liquidation Preference"). Following the payment of
the full amount of Series A Liquidation Preference, no additional distributions
shall be made to the holders of shares of Series A Junior Participating
Preferred Stock unless, prior thereto, the holders of shares of Class A Common
Stock shall have received an amount per share (the "Common Adjustment") equal to
the quotient obtained by dividing (i) Series A Liquidation Preference by (ii)
1,000 (as appropriately adjusted as set forth in paragraph (c) of this Section
2(C)(6) to reflect such events as stock splits, stock dividends and
recapitalization with respect to the Class A Common
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Stock) (such number in clause (ii), the "Adjustment Number"). Following the
payment of the full amount of Series A Liquidation Preference and the Common
Adjustment in respect of all outstanding shares of Series A Junior Participating
Preferred Stock and Class A Common Stock, respectively, holders of Series A
Junior Participating Preferred Stock and holders of shares of Class A Common
Stock shall receive their ratable and proportionate share of the remaining
assets to be distributed in the ratio of the Adjustment Number to 1 with respect
to such Series A Junior Participating Preferred Stock and Class A Common Stock,
on a per share basis, respectively.
(b) In the event, however, that there are not sufficient assets
available to permit payment in full of Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any, which
rank on a parity with Series A Junior Participating Preferred Stock, then such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Class A Common Stock.
(c) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Class A Common Stock payable
in shares of Class A Common Stock, (ii) subdivide the outstanding Class A Common
Stock or (iii) combine the outstanding Class A Common Stock into a smaller
number of shares, then in each such case the Adjustment Number in effect
immediately prior to such event shall be adjusted by multiplying such Adjustment
Number by a fraction the numerator of which is the number of shares of Class A
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Class A Common Stock that were outstanding
immediately prior to such event.
(7) CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Class A Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the provision
for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Class A Common Stock is
changed or exchanged. In the event the Corporation shall at any time after the
Rights Declaration Date (a) declare any dividend on Common Stock payable in
shares of Common Stock, (b) subdivide the outstanding Common Stock or (c)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount set forth in the
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preceding sentence with respect to the exchange or change of shares of Series A
Junior Participating Preferred Stock shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(8) NO REDEMPTION. The shares of Series A Junior Participating
Preferred Stock shall not be redeemable.
(9) RANKING. Series A Junior Participating Preferred Stock shall
rank junior to all other series of the Corporation's Preferred Stock which may
be issued from time to time as to the payment of dividends and the distribution
of assets, unless the terms of any such series shall provide otherwise.
(10) AMENDMENT. This Certificate of Incorporation shall not be
further amended in any manner which would materially alter or change the powers,
preferences or special rights of Series A Junior Participating Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of a
majority or more of the outstanding shares of Series A Junior Participating
Preferred Stock, voting separately as a class.
(11) FRACTIONAL SHARES. Series A Junior Participating Preferred Stock
may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
(D) PREFERRED STOCK
The Board of Directors is authorized to provide, by resolution, for
additional series of Preferred Stock to be comprised of authorized but unissued
shares of Preferred Stock. Except as may be required by law, the shares in any
series of Preferred Stock or any shares of capital stock of any other class need
not be identical to any other series of Preferred Stock or any other shares of
capital stock of any other class. Before any shares of any such series are
issued, the Board of Directors shall fix, and is hereby expressly empowered to
fix, by resolution, rights, preferences and privileges of, and qualifications,
restrictions and limitations applicable to, such series, including the
following:
(1) The designation of such series, the number of shares to
constitute such series and the stated value thereof (if different from the par
value thereof);
(2) Whether the shares of such series shall have voting rights, and,
if so, the terms of such voting rights, which may be general or limited;
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(3) The dividends, if any, payable on such series, whether any such
dividends shall be cumulative, and, if so, from what dates, the conditions and
dates upon which such dividends shall be payable, the preference or relation
which such dividends shall bear to the dividends payable on any shares of
capital stock of any other class or any other series of Preferred Stock;
(4) Whether the shares of such series shall be subject to redemption
by the Corporation and, if so, the times, prices and other conditions relating
to such redemption;
(5) The amounts payable in respect of shares of such series, and the
other rights of the holders of such shares, in the event of the voluntary or
involuntary liquidation, dissolution or winding up, or upon any distribution of
the assets, of the Corporation;
(6) Whether the shares of such series shall be subject to a
retirement or sinking fund, and, if so, the extent to and manner in which any
such retirement or sinking fund shall be applied to the purchase or redemption
of the shares of such series for retirement or other corporate purposes and the
other terms and provisions relating thereto;
(7) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of Class A Common Stock or any other series of
Preferred Stock or any other securities (whether or not issued by the
Corporation), and, if so, the price or prices or the rate or rates of conversion
or exchange and the method, if any, of adjustment thereof, and any other terms
and conditions of conversion or exchange;
(8) The limitations and restrictions, if any, to be effective upon
the payment of dividends or the making of other distributions on, or upon the
purchase, redemption or other acquisition by the Corporation of, Class A Common
Stock or shares of capital stock of any other class or any other series of
Preferred Stock; and
(9) The conditions (if any) applicable to, or restrictions (if any)
on, the creation of indebtedness of the Corporation or upon the issuance of any
additional capital stock, including additional shares of such series or any
other series of Preferred Stock or any other class of capital stock.
ARTICLE V
COMPOSITION OF BOARD OF DIRECTORS
AND STOCKHOLDER MEETINGS
SECTION 1. Except as may otherwise be provided by the terms of any
series of Preferred Stock or any other securities of the Corporation, the number
of Directors of the Corporation shall be as specified in the Bylaws of the
Corporation (the "Bylaws"),
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and such number may from time to time be increased or decreased in accordance
with the provisions thereof. The Directors of the Corporation shall be elected
at annual meetings of the Stockholders of the Corporation, as such are convened
by or pursuant to the Bylaws, and shall serve until the annual meeting of
Stockholders at which their respective successors are elected and until such
successors have been duly elected and qualified. The election of Directors need
not be by written ballot.
SECTION 2. The Directors of the Corporation, other than those who may
be elected pursuant to the terms of any series of Preferred Stock or any other
securities of the Corporation, shall be classified, with respect to the time for
which they hold office, into three classes, as nearly equal in number as
possible, as shall be provided in the Bylaws. The terms of the initial
Directors of the Corporation shall be determined by the Board of Directors at
the first organizational meeting of the Board of Directors with one class
designated as elected for a one-year term, the second class designated as
elected for a two-year term and the third class designated as elected for a
three-year term. At the annual meeting of the Stockholders of the Corporation
in the year following such organizational meeting of the Board of Directors and
at each subsequent annual meeting of Stockholders, the successors of the
Directors whose term expires at such meeting shall be elected to hold office for
a term expiring at the annual meeting of Stockholders held in the third year
following the year of election of such Directors. No decrease in the number of
Directors constituting the Board of Directors shall shorten the term of any
incumbent Director. Any Director elected to fill a newly-created directorship
of the Corporation or any vacancy on the Board of Directors resulting from any
death, resignation, removal or other cause shall hold office for the remainder
of the current term of the class of Directors in which such new directorship was
created or such vacancy occurred and until such Director's successor shall have
been elected and qualified.
SECTION 3. Except as otherwise provided by the terms of any series of
Preferred Stock or any other securities of the Corporation, newly-created
Directorships resulting from any increase in the number of Directors may be
filled by the Board of Directors, or as otherwise provided in the Bylaws, and
any vacancies on the Board of Directors resulting from death, resignation,
removal or other cause shall be filled by the affirmative vote of a majority of
the remaining Directors then in office, voting as a single class, even though
less than a quorum of the Board of Directors, or by a sole remaining Director,
or as otherwise provided in the Bylaws.
SECTION 4. Except as otherwise provided by the terms of any series of
Preferred Stock or any other securities of the Corporation, any Director of the
Corporation may be removed from office only for cause, and only by the
affirmative vote of the holders of 66-2/3 percent of the then outstanding shares
of Class A Common Stock. For purposes of this Section 4, "cause" shall
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mean the willful and continuous failure of a Director to substantially perform
such Director's duties to the Corporation (other than any such failure resulting
from incapacity because of physical or mental illness) or the willful engaging
by a Director in gross misconduct materially and demonstrably injurious to the
Corporation.
SECTION 5. Subject to the terms of any series of Preferred Stock or any
other securities of the Corporation, any action required or permitted to be
taken by the Stockholders of the Corporation may be effected at an annual or
special meeting of Stockholders of the Corporation duly called in accordance
with the Bylaws. Subject to the terms of any series of Preferred Stock or any
other securities of the Corporation, special meetings of Stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution approved by a majority of the entire Board of Directors or as
otherwise provided in the Bylaws of the Corporation. Notwithstanding anything
contained in this Certificate of Incorporation or the Bylaws to the contrary, no
action required or permitted to be taken at any meeting of Stockholders of this
Corporation may be taken by written consent without a meeting of Stockholders.
ARTICLE VI
PROCEDURES FOR CERTAIN BUSINESS TRANSACTIONS
SECTION 1. The provisions of Sections 2, 3, 4 and 5 of this Article VI
shall become effective at such time, but only from and after such time, as any
Interested Stockholder (as such term is defined in Section 6 hereof) shall have
acquired 15 percent of the combined Voting Power (as such term is defined in
Section 6 hereof) of all classes of Voting Stock (as such term is defined in
Section 6 hereof) then outstanding.
SECTION 2. In addition to any affirmative vote required by the Delaware
Law or by this Certificate of Incorporation or the terms of any series of
Preferred Stock or any other securities of the Corporation, and except as
otherwise expressly provided in Section 3 of this Article VI, the transactions
set forth below shall not be consummated without both the affirmative vote of
the holders of at least 80 percent of the combined Voting Power of the then
outstanding shares of all classes and series of Voting Stock and the affirmative
vote of a majority of the combined Voting Power of the then outstanding shares
of all classes and series of Voting Stock held by Disinterested Stockholders (as
such term is defined in Section 6 hereof), in each case voting together as a
single class. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that a lesser percentage may be specified, by
law or by this Certificate of Incorporation or the terms of any series of
Preferred Stock or any other securities of the Corporation or in any agreement
with any national securities exchange or otherwise. The following transactions
shall be subject to the limitation in this Section 2:
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(A) Any merger or consolidation of the Corporation with any Interested
Stockholder or with any other corporation, whether or not itself an Interested
Stockholder, which is, or after such merger or consolidation would be, an
Affiliate or Associate (as such terms are defined in Section 6 hereof) of an
Interested Stockholder;
(B) Any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder of all or substantially all of the assets of the Corporation or the
assets of its Subsidiaries (as such term is defined in Section 6 hereof)
representing in the aggregate more than 75 percent of the total value of the
assets of the Corporation's consolidated Subsidiaries as reflected on the most
recent consolidated balance sheet of the Corporation and its consolidated
Subsidiaries, prepared in accordance with generally accepted accounting
principles then in effect;
(C) Any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder of any assets of the Corporation or of any Subsidiary of the
Corporation having an aggregate Fair Market Value (as such term is defined in
Section 6 hereof) of $1,000,000 or more, but less than the amount referred to in
the preceding paragraph (B) of this Section 2, and any merger or consolidation
of any Subsidiary of the Corporation having assets with an aggregate Fair Market
Value of $1,000,000 or more with any Interested Stockholder or with any other
corporation, whether or not itself an Interested Stockholder, which is, or after
such merger or consolidation would be, an Affiliate or Associate of an
Interested Stockholder;
(D) The issuance or transfer by the Corporation or any Subsidiary of the
Corporation (in one transaction or a series of transactions) to any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder of any
securities of the Corporation or any Subsidiary of the Corporation in exchange
for cash, securities or other property (or a combination thereof) having an
aggregate Fair Market Value of $1,000,000 or more, other than the issuance of
securities upon the conversion of convertible securities of the Corporation or
any Subsidiary of the Corporation which were not acquired by such Interested
Stockholder (or such Affiliate or Associate) from the Corporation or a
Subsidiary of the Corporation;
(E) The adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of any Interested
Stockholder or by any Affiliate or Associate of any Interested Stockholder; and
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(F) Any reclassification of securities (including any reverse stock split)
or recapitalization of the Corporation, or any merger or consolidation of the
Corporation with any of its Subsidiaries, or any other transaction (whether or
not with or into or otherwise involving any Interested Stockholder, Affiliate or
Associate), which in any such case has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class or
series of capital stock or securities convertible into capital stock of the
Corporation or any Subsidiary of the Corporation which is directly or indirectly
beneficially owned by any Interested Stockholder or any Affiliate or Associate
of any Interested Stockholder.
SECTION 3. Notwithstanding anything to the contrary contained in this
Article VI, the provisions of Section 2 of this Article VI shall not be
applicable to any business transaction referred to in paragraphs (A) through (F)
of Section 2 above (hereinafter referred to as a "Business Combination") and any
such Business Combination shall require only such affirmative vote as is
required by law and by any other provision of this Certificate of Incorporation
and by the terms of any class or series of Preferred Stock or any other
securities of the Corporation, if the conditions specified in the applicable
provisions of the following have been met:
(A) The Business Combination has been approved by a majority of the
Disinterested Directors (as such term is defined in Section 6 hereof), and the
Interested Stockholder involved in such Business Combination had acquired the
status of an Interested Stockholder in a manner substantially consistent with an
agreement or memorandum of understanding approved by the Board of Directors
prior to the time such Interested Stockholder acquired such status and the
Interested Stockholder has complied with all requirements imposed by such
agreement or memorandum of understanding; or
(B) In the case of any Business Combination described in subsections (A),
(B), (D) or (F) of Section 2 of this Article VI, such Business Combination shall
have been approved by a majority of the Disinterested Directors; or
(C) All of the conditions specified in the following clauses (1) through
(6) shall have been met:
(1) The transaction constituting the Business Combination shall
provide for a consideration to be received by holders of the then outstanding
Common Stock in exchange for all of their shares in an amount equal to the
highest of the following:
(a) If applicable, the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid to
acquire any shares of Common Stock in question directly or indirectly
beneficially owned by the Interested Stockholder or its Affiliates or Associates
which were
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acquired within the two-year period immediately prior to the Announcement Date
(as such term is defined in Section 6 hereof) or in the transaction in which it
became an Interested Stockholder, whichever is higher; or
(b) The Fair Market Value per share of the class of Common Stock
in question on the Announcement Date or on the Determination Date (as such term
is defined in Section 6 hereof), whichever is higher; and
(2) If the transaction constituting the Business Combination shall
provide for a consideration to be received by holders of any class or series of
outstanding Voting Stock other than Common Stock, the aggregate amount as of the
date of the consummation of the Business Combination of all consideration to be
received by holders of shares of such Voting Stock shall be at least equal to
the highest of the following (it being intended that the requirements of this
clause shall be required to be met with respect to every class and series of
such outstanding Voting Stock, whether or not the Interested Stockholder
beneficially owns any shares of a particular class or series of Voting Stock):
(a) If applicable, the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid to
acquire any shares of such class or series of Voting Stock which are directly or
indirectly beneficially owned by the Interested Stockholder which were acquired
within the two-year period immediately prior to the Announcement Date or in the
transaction in which it became an Interested Stockholder, whichever is higher;
or
(b) If applicable, the highest preferential amount per share to
which the holders of shares of such class or series of Voting Stock are entitled
in the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Corporation; or
(c) The Fair Market Value per share of such class or series of
Voting Stock on the Announcement Date or on the Determination Date, whichever is
higher; and
(3) The consideration to be received by holders of a particular class
or series of outstanding Voting Stock (including holders of Common Stock) shall
be in cash or in the same form as was previously paid to acquire shares of such
class or series of Voting Stock which are directly or indirectly beneficially
owned by the Interested Stockholder or its Affiliates or Associates, and, if the
Interested Stockholder directly or indirectly beneficially owns shares of any
class or series of Voting Stock which were acquired with varying forms of
consideration, the form of consideration to be received by holders of such class
or series of Voting Stock shall be either cash or the form used to acquire the
largest number of shares of such class or series of Voting Stock directly or
indirectly beneficially owned by it, it being
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understood that the prices determined in accordance with this Section 3(C)(3)
shall be appropriately adjusted in the event of any stock dividend, stock split
or subdivision or combination of shares or any similar event; and
(4) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination:
(a) Except as approved by a majority of the Disinterested
Directors, there shall have been no failure to declare and pay at the regular
dates therefor the full amount of any dividends (whether or not cumulative)
payable on Preferred Stock or any class or series of capital stock having a
preference over Common Stock as to dividends or upon liquidation; and
(b) There shall have been no reduction in the annual rate of
dividends paid on Common Stock (except as necessary to reflect any subdivision
of such class of Common Stock) or as approved by a majority of the Disinterested
Directors, and no increase in such annual rate of dividends (as necessary to
prevent any such reduction) in the event of any reclassification (including any
reverse stock split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of outstanding shares of
Common Stock, unless the failure to so increase such annual rate is approved by
a majority of the Disinterested Directors; and
(c) Such Interested Stockholder shall not have become the direct
or indirect beneficial owner of any additional shares of Voting Stock, except as
part of the transaction in which it became an Interested Stockholder; and
(5) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the benefit,
directly or indirectly (except proportionately as a Stockholder), of any loan,
advance, guarantee, pledge or other arrangement provided by the Corporation or
any Subsidiary, whether in anticipation of or in connection with such Business
Combination or otherwise; and
(6) If applicable, a proxy or information statement describing the
proposed Business Combination and complying with the requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder (or any subsequent provisions replacing
the Exchange Act or such rules or regulations), shall be mailed to public
Stockholders of the Corporation at least 30 calendar days prior to the
consummation of such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to the Exchange Act or
subsequent provisions).
SECTION 4. A majority of the Disinterested Directors of the Corporation
shall have the power and duty to determine, on the
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basis of information known to them after reasonable inquiry, all facts necessary
to determine compliance with this Article VI, and the good faith determination
of a majority of the Disinterested Directors on such matters shall be conclusive
and binding for all thereof.
SECTION 5. Nothing contained in this Article VI shall relieve any
Interested Stockholder from any fiduciary obligation imposed by law upon him to
the Corporation, its Stockholders or otherwise.
SECTION 6. The following definitions shall apply for purposes of this
Article VI:
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act, as in effect on January 1, 1990.
"Announcement Date" shall mean the date of first public announcement
of the proposed Business Combination.
"Beneficial Owner" shall be a person or any of its Affiliates or
Associates who beneficially owns, directly or indirectly, any Common Stock or
other security or interest, or which such other person or any of its Affiliates
or Associates has the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise, or the right to vote or to direct the
vote pursuant to any agreement, arrangement or understanding, or which are
beneficially owned, directly or indirectly, by any other person with which such
person or any of its Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of any
shares of Voting Stock or such other security or interest.
"Determination Date" shall mean the date on which the Interested
Stockholder became an Interested Stockholder.
"Disinterested Director" shall mean any member of the Board of
Directors of the Corporation who is unaffiliated with, and not a nominee of, the
Interested Stockholder or any Affiliate or Associate of the Interested
Stockholder and who was a member of the Board of Directors prior to the time
that the Interested Stockholder became an Interested Stockholder, and any
successor of a Disinterested Director who is unaffiliated with, and not a
nominee of, the Interested Stockholder or any Affiliate or Associate of the
Interested Stockholder and who is recommended for election or elected to succeed
a Disinterested Director by a majority of Disinterested Directors then on the
Board of Directors.
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"Disinterested Stockholder" shall mean a Stockholder of the
Corporation who is not an Interested Stockholder or an Affiliate or an Associate
of an Interested Stockholder.
"Fair Market Value" shall mean, in the case of capital stock, the
highest closing sales price during the ten (10) business day period immediately
preceding the date in question of a share of such capital stock as reported (i)
in the consolidated transaction reporting system for the principal United States
of America securities exchange registered under the Exchange Act on which such
capital stock is listed, or, (ii) if such capital stock is not listed on any
such exchange, the highest closing sales price or bid quotation with respect to
a share of such capital stock during the ten (10) business period preceding the
date in question on the National Association of Securities Dealers, Inc.,
Automated Quotations System, or any system then in use, or, (iii) if neither (i)
and (ii) are available, then on the principal exchange in Canada on which such
capital stock is listed and, (iv) if no such quotations are available, the fair
market value on the date in question of a share of such capital stock as
determined by a majority of the Disinterested Directors in good faith, and in
the case of capital stock of any class or series which is not traded on any
securities exchange or in the over-the-counter market, or in the case of
property other than cash or capital stock, the fair market value of such capital
stock or property, as the case may be, on the date in question as determined by
a majority of the Disinterested Directors in good faith.
"Interested Stockholder" shall mean any person who is the beneficial
owner, directly or indirectly, of 15 percent or more of the then outstanding
shares of Common Stock, or is an Affiliate of the Corporation and at any time
within the two-year period immediately prior to the date in question was the
Beneficial Owner, directly or indirectly, of 15 percent or more of the then
outstanding shares of Common Stock, or is an assignee of or has otherwise
succeeded to the beneficial ownership of any shares of Common Stock which were
at any time within the two-year period immediately prior to the date in question
beneficially owned by any Interested Stockholder, if such assignment or
succession shall have occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), or other public
distribution regardless of whether registered under the Securities Act.
Notwithstanding the foregoing, an Interested Stockholder shall not include
(i) any corporation of which the Corporation is a wholly owned subsidiary,
(ii) the Corporation or any Subsidiary of the Corporation or (iii) any employee
benefit plan of the Corporation or of any Subsidiary of the Corporation or any
person holding any Common Stock for or pursuant to the terms of any such
employee benefit plan. For the purposes of determining whether a person is an
Interested Stockholder, the number of shares of Common Stock deemed to be
outstanding shall include shares deemed to be owned by such person and the
Affiliate or Associate of such person, but
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<PAGE>
shall not include any other shares of Common Stock which may be issuable to
other persons pursuant to any agreement, arrangement or understanding, or upon
the exercise of conversion rights, exchange rights, warrants or options, or
otherwise.
"Subsidiary" shall mean a person of which the majority of the total
outstanding Voting Power is owned directly or indirectly, by another person or
by one or more other Subsidiaries of such other person or by such person and one
or more other Subsidiaries of such other person; PROVIDED, that for the purposes
of the definition of Interested Stockholder set forth in this Article VI, the
term "Subsidiary" shall mean only a person of which the majority of the total
outstanding Voting Power is owned by the Corporation, a Subsidiary of the
Corporation or by the Corporation and one or more of its Subsidiaries.
"Voting Power" when used with reference to the capital stock of, or
units of equity interests in, any person shall mean the power under ordinary
circumstances (or as a result of the occurrence of a contingency) to vote in the
election of Directors of such person (if such person is a corporation) or to
participate in the management and control of such person (if such person is not
a corporation).
"Voting Stock" shall mean capital stock of the Corporation of all
classes and series entitled to vote generally in the election of Directors of
the Corporation.
ARTICLE VII
ADDITIONAL STATUTORY PROCEDURES FOR BUSINESS
COMBINATIONS WITH INTERESTED STOCKHOLDERS
The Corporation does hereby adopt and incorporate herein by this reference
all of the provisions of Section 203 of the Delaware Law, except for the
provisions of Section 203(b)(4) of the Delaware Law, and such adopted provisions
shall govern and be applicable to the Corporation, notwithstanding any fact or
circumstance where the Corporation does not have a class of Voting Stock that is
(i) listed on a national securities exchange, (ii) authorized for quotation on
an interdealer quotation system of a registered national securities association
or (iii) held of record by more than 2,000 Stockholders.
ARTICLE VIII
INDEMNIFICATION
SECTION 1. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a Director or an
officer of the Corporation, against expenses (including, without
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<PAGE>
limitation, attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred thereby in connection with such action, suit or
proceeding to the fullest extent permitted by the Delaware Law and any other
applicable law as from time to time in effect. Such right of indemnification
shall not be deemed to be exclusive of any rights to which any such Director or
officer may otherwise be entitled. The foregoing provisions of this Section 1
shall be deemed to be a contract between the Corporation and each Director and
officer of the Corporation serving in such capacity at any time while this
Section 1 is in effect, and any repeal or modification thereof shall not affect
any right or obligation then existing with respect to any state of facts then or
theretofore existing or any action, suit or proceeding theretofore or thereafter
brought or threatened based in whole or in part upon any such state of facts.
SECTION 2. The Corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was an employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a Director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including, without
limitation, attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred thereby in connection with such action, suit or
proceeding to the extent permitted by and in the manner set forth in and
permitted by the Delaware Law and any other applicable law as from time to time
in effect. Such right of indemnification shall not be deemed to be exclusive of
any other rights to which any such person may otherwise be entitled.
ARTICLE IX
LIABILITY FOR BREACH OF FIDUCIARY DUTY
To the fullest extent permitted by the Delaware Law, a Director of the
Corporation shall not be liable to the Corporation or its Stockholders for
monetary damages for breach of fiduciary duty as a Director. In furtherance
thereof, a Director of the Corporation shall not be personally liable to the
Corporation or its Stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its Stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware Law, as the same
exists or hereafter may be amended, or (iv) for any transaction from which the
Director derived an improper personal benefit. If the Delaware Law hereafter is
amended to authorize the further elimination or limitation of the liability of
Directors, then the liability of Directors shall be eliminated or limited to the
full extent authorized by the Delaware Law, as so amended.
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<PAGE>
ARTICLE X
RIGHT TO AMEND CERTIFICATE OF INCORPORATION
Subject to the provisions of this Certificate of Incorporation, the
Corporation reserves the right to amend, alter or repeal any provision contained
in this Certificate of Incorporation, in the manner now or hereafter prescribed
by statute, and all rights conferred upon Stockholders herein are subject to
this reservation except that irrespective of any requirements of law and any
other provisions of this Certificate of Incorporation, or the terms of any
series of Preferred Stock, or any other securities of the Corporation (and
notwithstanding the fact that a lesser percentage may be specified by law, this
Certificate of Incorporation or the terms of any series of Preferred Stock or
any other securities of the Corporation), the affirmative vote of the holders of
66-2/3 percent or more of the then outstanding shares of Common Stock shall be
required to amend, alter, repeal or adopt any provision inconsistent with
Articles V, VI, VII, VIII, IX or X of this Certificate of Incorporation.
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<PAGE>
This Amended and Restated Certificate of Incorporation has been duly
adopted in accordance with Delaware Law.
IN WITNESS WHEREOF, Physician Partners, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed by David Goldberg, its
President, and attested to by Tim Dupell, its Secretary, this 18th day of
September, 1996.
PHYSICIAN PARTNERS, INC.
By: /s/ David Goldberg
-------------------
David Goldberg
ATTEST:
By: /s/Tim Dupell
-----------------------------
Tim Dupell
Secretary
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<PAGE>
EXHIBIT D-2
BYLAWS
OF
PHYSICIAN PARTNERS, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLE I - Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1. Registered Office. . . . . . . . . . . . . . . . . . . 1
SECTION 2. Other Offices. . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - Meetings of Stockholders . . . . . . . . . . . . . . . . . . . . 1
SECTION 1. Place of Meeting . . . . . . . . . . . . . . . . . . . 1
SECTION 2. Annual Meetings. . . . . . . . . . . . . . . . . . . . 1
SECTION 3. Special Meetings . . . . . . . . . . . . . . . . . . . 1
SECTION 4. Notice of Meetings . . . . . . . . . . . . . . . . . . 2
SECTION 5. Quorum . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 6. Adjournments . . . . . . . . . . . . . . . . . . . . . 2
SECTION 7. Order of Business. . . . . . . . . . . . . . . . . . . 2
SECTION 8. List of Stockholders . . . . . . . . . . . . . . . . . 3
SECTION 9. Voting and Proxies . . . . . . . . . . . . . . . . . . 4
SECTION 10. Inspectors . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 11. Consent in Lieu of Meeting . . . . . . . . . . . . . . 5
ARTICLE III - Board of Directors. . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 1. General Powers . . . . . . . . . . . . . . . . . . . . 5
SECTION 2. Number, Qualification and Election . . . . . . . . . . 5
SECTION 3. Notification of Nominations. . . . . . . . . . . . . . 6
SECTION 4. Quorum and Voting. . . . . . . . . . . . . . . . . . . 7
SECTION 5. Place of Meeting . . . . . . . . . . . . . . . . . . . 7
SECTION 6. Regular Meetings . . . . . . . . . . . . . . . . . . . 8
SECTION 7. Special Meetings . . . . . . . . . . . . . . . . . . . 8
SECTION 8. Notice of Meetings . . . . . . . . . . . . . . . . . . 8
SECTION 9. Rules and Regulations. . . . . . . . . . . . . . . . . 8
SECTION 10. Participation in Meeting by Means of Communications
Equipment . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 11. Action without Meeting . . . . . . . . . . . . . . . . 9
SECTION 12. Resignations . . . . . . . . . . . . . . . . . . . . . 9
SECTION 13. Removal of Directors . . . . . . . . . . . . . . . . . 9
SECTION 14. Vacancies. . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 15. Compensation . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE IV - Executive and Other Committees . . . . . . . . . . . . . . . . . 10
SECTION 1. Executive Committee. . . . . . . . . . . . . . . . . . 10
SECTION 2. Nominating Committee . . . . . . . . . . . . . . . . . 10
SECTION 2. Other Committees . . . . . . . . . . . . . . . . . . . 11
SECTION 3. Procedure; Meeting; Quorum . . . . . . . . . . . . . . 11
ARTICLE V - Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 1. Number; Term of Office . . . . . . . . . . . . . . . . 12
SECTION 2. Removal. . . . . . . . . . . . . . . . . . . . . . . . 13
<PAGE>
SECTION 3. Resignation. . . . . . . . . . . . . . . . . . . . . . 13
SECTION 4. Vacancies. . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 5. Chairman of the Board. . . . . . . . . . . . . . . . . 13
SECTION 6. The President. . . . . . . . . . . . . . . . . . . . . 13
SECTION 7. Vice-Chairman of the Board . . . . . . . . . . . . . . 14
SECTION 8. Chairman of the Executive Committee. . . . . . . . . . 14
SECTION 9. Vice-Presidents. . . . . . . . . . . . . . . . . . . . 14
SECTION 10. Treasurer. . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 11. Secretary. . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 12. Chief Financial Officer. . . . . . . . . . . . . . . . 14
SECTION 13. Assistant Treasurers and Secretaries . . . . . . . . . 15
SECTION 14. Salaries . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 15. Delegation of Duties . . . . . . . . . . . . . . . . . 15
ARTICLE VI - Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 1. Directors and Officers . . . . . . . . . . . . . . . . 15
SECTION 2. Agents and Employees . . . . . . . . . . . . . . . . . 16
ARTICLE VII - Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 1. Certificates for Shares. . . . . . . . . . . . . . . . 16
SECTION 2. Transfer of Shares . . . . . . . . . . . . . . . . . . 16
SECTION 3. Addresses of Stockholders. . . . . . . . . . . . . . . 17
SECTION 4. Lost, Destroyed and Mutilated Certificates . . . . . . 17
SECTION 5. Regulations. . . . . . . . . . . . . . . . . . . . . . 18
SECTION 6. Fixing Date for Determination of Stockholders
of Record . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE VIII - Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE IX - Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE X - Waiver of Notice. . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE XI - Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE XII - Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 1. Execution of Documents . . . . . . . . . . . . . . . . 19
SECTION 2. Deposits . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3. Checks . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 4. Stock in Other Corporations. . . . . . . . . . . . . . 20
SECTION 5. Bylaws subject to Law and Certificate of
Incorporation . . . . . . . . . . . . . . . . . . . . 20
<PAGE>
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of Physician
Partners, Inc. (the "Corporation") in the State of Delaware shall be at
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of the Corporation's registered agent at such address
is The Corporation Trust Company.
SECTION 2. OTHER OFFICES. The Corporation may also have an office
or offices and keep the books and records of the Corporation, except as may
otherwise be required by law, at such other place or places, either within or
outside of the State of Delaware, as the Corporation's board of directors (the
"Board of Directors") may from time to time determine or as the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETING. All meetings of the stockholders of
the Corporation (the "Stockholders"), whether annual or special, shall be held
at an office of the Corporation or at such other places, within or outside of
the State of Delaware, as may be fixed from time to time by the Board of
Directors.
SECTION 2. ANNUAL MEETINGS. The annual meetings of the
Stockholders for the election of directors of the Corporation and for the
transaction of such other business as may properly come before such meetings
shall be held on second Friday of May each year, if such date is not a legal
holiday under the laws of the location at which such meeting is to be held or,
if such date is such a legal holiday, then on the next succeeding day which is
not such a legal holiday under such laws, or on such other date and, in any
case, at such hour as may be fixed from time to time by the Board of Directors.
SECTION 3. SPECIAL MEETINGS. Subject to the rights of the holders
of any class or series of capital stock having a preference over the
Corporation's common stock (the "Common Stock") as to dividends or upon
liquidation, a special meeting of the Stockholders for any purpose or purposes,
unless otherwise prescribed by statute or the Certificate of Incorporation of
the Corporation, as amended from time to time ("Certificate of Incorporation"),
may be called only by a majority of the entire Board of Directors. The
Secretary shall convene a special meeting on the request of such a majority of
the Board of Directors. The request shall specify the business to come before
the special meeting and only such business as is specified in such request
<PAGE>
shall be included in the notice of any special meeting of the Stockholders and
shall come before such special meeting.
SECTION 4. NOTICE OF MEETINGS. Written notice of each meeting of
the Stockholders, whether annual or special, shall be provided, either by
personal delivery or by mail, not less than 10 days nor more than 60 days prior
to the date of such meeting to each Stockholder of record entitled to notice of
such meeting. If mailed, such notice shall be deemed to be provided to a
Stockholder when deposited in the United States mail, postage prepaid, directed
to such Stockholder at such Stockholder's address as such address appears on the
records of the Corporation. Each such notice shall state the place, date and
hour of such meeting and the purpose or purposes for which such meeting is
called. Notice of any meeting of Stockholders shall not be required to be
provided to any Stockholder which shall attend such meeting in person or by
proxy without protesting, prior to or at the commencement of such meeting, the
lack of proper notice to such Stockholder or which shall waive notice thereof as
provided in Article X of these Bylaws. Notice of adjournment of a meeting of
Stockholders need not be provided if the time and place to which it is adjourned
are announced at such meeting, unless the adjournment is for more than 30 days
or, after the announced adjournment, a new record date is fixed for the
adjourned meeting.
SECTION 5. QUORUM. The holders of a majority of the votes entitled
to be cast by the Stockholders entitled to vote (which, if any vote is to be
taken by classes, shall mean the holders of a majority of the votes entitled to
be cast by the Stockholders of each class) present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of the
Stockholders.
SECTION 6. ADJOURNMENTS. In the absence of a quorum, the holders
of a majority of the votes entitled to be cast by the Stockholders present, in
person or by proxy, may adjourn the meeting from time to time. At any such
adjourned meeting at which a quorum may be present, any business may be
transacted which might have been transacted at the meeting as originally called.
SECTION 7. ORDER OF BUSINESS. At each meeting of the Stockholders,
the Chairman of the Board, or, in the absence of the Chairman of the Board, such
person designated by the Board of Directors, shall act as chairman. At any
annual meeting held after the Effective Time (as such term is defined in the
Certificate of Incorporation), only such business shall be conducted as shall
have been brought before such annual meeting (i) by or at the direction of the
Board of Directors or (ii) by
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<PAGE>
any Stockholder which complies with the procedures set forth in this Section 7.
For business properly to be brought by a Stockholder before an
annual meeting held after the Effective Time, the Stockholder must have provided
timely notice thereof in proper written form to the Secretary of the
Corporation. To be timely, a Stockholder's notice must be delivered to, or
mailed and received at, the principal executive offices of the Corporation not
less than 30 days nor more than 60 days prior to the annual meeting; PROVIDED,
HOWEVER, that in the event that less than 40 days notice or prior public
disclosure of the date of the annual meeting is provided or made to the
Stockholders, notice by the Stockholder to be timely must be received not later
than the close of business on the 10th day following the day on which such
notice of the date of the annual meeting was mailed or such public disclosure
was made. To be in proper written form, a Stockholder's notice to the Secretary
shall set forth in writing as to each matter the Stockholder proposes to bring
before the annual meeting: (i) a brief description of the business desired to
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting; (ii) the name and address, as they appear on the
Corporation's books, of the Stockholder proposing such business; (iii) the class
and number of shares of the Corporation which are beneficially owned by the
Stockholder; and (iv) any material interest of the Stockholder in such business.
Notwithstanding anything contained in these Bylaws to the contrary,
no business shall be conducted at an annual meeting except in accordance with
the procedures set forth in this Section 7. The chairman of an annual meeting
shall, if the facts warrant, determine and declare to the annual meeting that
business was not properly brought before the annual meeting in accordance with
the provisions of this Section 7, and if he should so determine, then he shall
so declare to the annual meeting and any such business not properly brought
before the annual meeting shall not be transacted.
SECTION 8. LIST OF STOCKHOLDERS. It shall be the duty of the
Secretary or other officer of the Corporation who has charge of the stock ledger
to prepare and make, at least 10 days before each meeting of the Stockholders, a
complete list of the Stockholders entitled to vote thereat, arranged in
alphabetical order, and showing the address of each Stockholder and the number
of shares registered in such Stockholder's name. Such list shall be produced
and kept available for inspection at the times and
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<PAGE>
places, including during the conduct of meetings, as may be required by law.
SECTION 9. VOTING AND PROXIES. Each Stockholder of record of any
class or series of capital stock having a preference over Common Stock as to
dividends or upon liquidation shall be entitled at each meeting of the
Stockholders to such number of votes for each share of such capital stock as may
be fixed in the Certificate of Incorporation or in the resolution or resolutions
adopted by the Board of Directors providing for the issuance of such stock.
Each Stockholder of record of Common Stock shall be entitled at each meeting of
the Stockholders to one vote for each share of such capital stock registered in
such Stockholder's name on the books of the Corporation:
(a) on the date fixed pursuant to Section 6 of Article VII of
these Bylaws as the record date for the determination of Stockholders
entitled to notice of and to vote at such meeting; or
(b) if no such record date shall have been so fixed, then at the
close of business on the day next preceding the day on which notice of such
meeting is provided, or if notice is waived, then at the close of business
on the day next preceding the day on which the meeting is held.
Each Stockholder entitled to vote at any meeting of the Stockholders
may authorize not in excess of three persons to act for such Stockholder by a
proxy signed by such Stockholder or such Stockholder's attorney-in-fact. Any
such proxy shall be delivered to the secretary of such meeting at or prior to
the time designated for holding such meeting, but in any event not later than
the time designated in the order of business for so delivering such proxies. No
such proxy shall be voted or acted upon after three years from its date, unless
the proxy provides for a longer period.
Except as provided in the Certificate of Incorporation, at each
meeting of the Stockholders, all corporate actions to be taken by vote of the
Stockholders shall be authorized by a majority of the votes cast by the
Stockholders entitled to vote thereon, present in person or represented by
proxy, and where a separate vote by class is required, a majority of the votes
cast by the Stockholders of such class, present in person or represented by
proxy, shall be the act of such class.
Unless required by law or determined by the chairman of the meeting
to be advisable, the vote on any matter, including the
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<PAGE>
election of directors, need not be by written ballot. In the case of a vote by
written ballot, each ballot shall be signed by the Stockholder voting, or by
such Stockholder's proxy, and shall state the number of shares voted.
SECTION 10. INSPECTORS. Either the Board of Directors or, in the
absence of designation of inspectors by the Board of Directors, the chairman of
any meeting of the Stockholders may, in its or such person's discretion, appoint
two or more inspectors to act at any meeting of the Stockholders. Such
inspectors shall perform such duties as shall be specified by the Board of
Directors or the chairman of the meeting. Inspectors need not be Stockholders,
employees, officers or directors of the Corporation. No director or nominee for
the office of director shall be appointed as any such inspector.
SECTION 11. CONSENT IN LIEU OF MEETING. Notwithstanding anything
contained in these Bylaws to the contrary, no action required or permitted to be
taken at any meeting of Stockholders of this Corporation may be taken by written
consent without a meeting of Stockholders.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors, which may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by law or by the Certificate of Incorporation
directed or required to be exercised or done by the Stockholders.
SECTION 2. NUMBER, QUALIFICATION AND ELECTION. Except as otherwise
provided in the Certificate of Incorporation, the number of directors of the
Corporation shall be determined from time to time by the vote of a majority of
the entire Board of Directors, provided that the number thereof may not be less
than three.
Each of the directors of the Corporation shall hold office until
(i) the next annual meeting of the Stockholders following such director's
election and until such director's successor shall have been elected and
qualified or (ii) his earlier death, resignation or removal in the manner that
the directors of the Corporation other than those who may be elected pursuant to
the terms of any series of preferred stock or any other securities of the
Corporation other than Common Stock may determine from time to time. The
directors of the Corporation
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<PAGE>
shall be classified, with respect to the time for which they hold office, into
three classes as nearly equal in number as possible: one class whose term
expires at the first annual meeting of Stockholders after the first
organizational meeting of the Board of Directors, another class whose term
expires at the second annual meeting of Stockholders to be held after the first
organizational meeting of the Board of Directors and another class whose term
expires at the third annual meeting of Stockholders to be held after the first
organizational meeting of the Board of Directors, with the directors in each
class to hold office until theirs successors are elected and qualified. The
classes shall be initially comprised of directors elected by the Stockholders at
their initial meeting. If the number of directors is changed by the Board of
Directors, then any newly-created directorships or any decrease in directorships
shall be so apportioned among the classes as to make all classes as nearly equal
in number as possible; PROVIDED, HOWEVER, that no decrease in the number of
directors shall shorten the term of any incumbent director. At each annual
meeting of the Stockholders, subject to the rights of the holders of any class
or series of capital stock having a preference over Common Stock as to dividends
or upon liquidation, the successors of the class of directors whose term expires
at that meeting shall be elected to hold office for a term expiring at the
annual meeting of Stockholders held in the third year following the year of
their election.
Directors need not be Stockholders. In any election of directors,
the persons receiving a plurality of the votes cast, up to the number of
directors to be elected in such election, shall be deemed to be elected.
SECTION 3. NOTIFICATION OF NOMINATIONS. Subject to the rights of
the holders of any class or series of capital stock having a preference over
Common Stock as to dividends or upon liquidation, nominations for the election
of directors may be made by the Board of Directors or by any Stockholder
entitled to vote for the election of directors.
A Stockholder's nomination shall be made by giving timely notice in
proper written form thereof to the Secretary of the Corporation. To be timely,
a Stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 30 calendar days
nor more than 60 calendar days prior to the meeting; PROVIDED, HOWEVER, that in
the event that less than 40 calendar days' notice or prior public disclosure of
the date of the meeting is provided or made to the Stockholders, notice by the
Stockholder to be timely must be so received not later than the close of
business on the 10th
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<PAGE>
calendar day following the day on which such notice of the date of the meeting
was mailed or such public disclosure was made.
To be in proper written form, such Stockholder's notice shall set
forth in writing (i) as to each person whom the Stockholder proposes to nominate
for election or reelection as a director, all information relating to such
person that is required to be disclosed in solicitations of proxies for the
election of directors or is otherwise required, in each case pursuant to
Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended, including, without limitation, such person's written consent to being
named in the proxy statement as a nominee and to serving as a director if
elected and (ii) as to the Stockholder giving the notice (x) the name and
address, as they appear on the Corporation's books, of such Stockholder and (y)
the class and number of shares of capital stock of the Corporation which are
beneficially owned by such Stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the Secretary of the Corporation the information
required to be set forth in a Stockholder's notice of nomination which pertains
to the nominee.
In the event that a Stockholder seeks to nominate one or more
directors, the Secretary shall appoint two inspectors, who shall not be
affiliated with the Corporation, to determine whether a Stockholder has complied
with this Section 3. If the inspectors shall determine that a Stockholder has
not complied with this Section 3, then the inspectors shall direct the chairman
of the meeting to declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and the chairman
shall so declare to the meeting and the defective nomination shall be
disregarded.
SECTION 4. QUORUM AND VOTING. Except as may otherwise be provided
by these Bylaws, a majority of the entire Board of Directors shall constitute a
quorum for the transaction of business at any meeting of the Board of Directors,
and, except as so provided, the vote of a majority of the directors present at
any meeting at which a quorum is present shall be the act of the Board of
Directors. In the absence of a quorum, a majority of the directors present may
adjourn the meeting to another time and place. At any adjourned meeting at
which a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called.
SECTION 5. PLACE OF MEETING. The Board of Directors may hold its
meetings at such place or places within or without
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the State of Delaware as the Board of Directors may from time to time determine
or as shall be specified or fixed in the respective notices or waivers of notice
thereof.
SECTION 6. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such times and places as the Board of Directors shall
from time to time by resolution determine, except that the annual meeting of the
Board of Directors to elect officers of the Corporation for the ensuing year
shall be held within 10 days after the annual meeting of Stockholders. If any
day fixed for a regular meeting shall be a legal holiday under the laws of the
place where the meeting is to be held, then the meeting which would otherwise be
held on that day shall be held at the same hour on the next succeeding business
day.
SECTION 7. SPECIAL MEETINGS. Special meetings of the Board of
Directors shall be held whenever called by the President, Chief Financial
Officer, Chairman of the Board, a Vice President who is an executive officer,
the Secretary or by a majority of the directors.
SECTION 8. NOTICE OF MEETINGS. Notice of regular meetings of the
Board of Directors or of any adjourned meeting thereof need not be provided,
except as required pursuant to Article XI of these Bylaws. Notice of each
special meeting of the Board of Directors shall be mailed to each director,
addressed to such director at such director's residence or usual place of
business, at least two calendar days before the day on which the meeting is to
be held or shall be sent to such director at such place by telegraph or be
delivered personally or by telephone or telecopy not later than the calendar day
before the meeting is to be held, but notice need not be provided to any
director who shall, either before or after such meeting, submit a signed waiver
of such notice or who shall attend such meeting without protesting, prior to or
at its commencement, the lack of notice to such director. Every such notice
shall state the time and place but need not state the purpose of the meeting.
SECTION 9. RULES AND REGULATIONS. The Board of Directors may adopt
such rules and regulations not inconsistent with the provisions of these Bylaws
for the conduct of its meetings and management of the affairs of the Corporation
as the Board of Directors may deem to be proper. In the absence of the Chairman
of the Board, such person designated by the Board of Directors shall preside at
meetings of the Board of Directors.
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SECTION 10. PARTICIPATION IN MEETING BY MEANS OF COMMUNICATIONS
EQUIPMENT. Any one or more members of the Board of Directors or any committee
thereof may participate in any meeting of the Board of Directors or of any such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at such
meeting.
SECTION 11. ACTION WITHOUT MEETING. Any action required or
permitted to be taken at any meeting of the Board of Directors or any committee
thereof may be taken without a meeting if all of the members of the Board of
Directors or of any such committee consent thereto in writing and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
of such committee.
SECTION 12. RESIGNATIONS. Any director of the Corporation may at
any time resign by giving written notice to the Board of Directors, the Chairman
of the Board, the President or the Secretary of the Corporation. Such
resignation shall take effect at the time specified therein or, if the time is
not specified, upon receipt thereof; and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.
SECTION 13. REMOVAL OF DIRECTORS. Any director may be removed at
any time only for cause by an affirmative vote of the holders of 66-2/3% of the
shares then entitled to vote in the election of directors. The vacancy in the
Board of Directors caused by any such removal may be filled by the Stockholders
at such meeting or as provided in Section 14 of this Article III.
SECTION 14. VACANCIES. In the case of any vacancy on the Board of
Directors or in the case of any newly-created directorship, a director elected
to fill the vacancy or the newly-created directorship for the unexpired portion
of the term being filled may be elected by a majority of the directors of the
Corporation then in office, though less than a quorum, or by a sole remaining
director. The director elected to fill any such vacancy shall hold office for
the unexpired term in respect of which such vacancy occurred and until his
successor shall be elected and shall qualify or until his earlier death,
resignation or removal in the manner provided by these Bylaws.
SECTION 15. COMPENSATION. Each director who shall not at the time
also be a salaried officer or employee of the Corporation or any of its
subsidiaries (hereinafter referred to as
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an "outside director"), in consideration of such person serving as a director,
shall be entitled to receive from the Corporation such amount per annum and such
fees for attendance at meetings of the Board of Directors or of committees of
the Board of Directors, or both, as the Board of Directors shall from time to
time determine. In addition, each director, whether or not an outside director,
shall be entitled to receive from the Corporation reimbursement for the
reasonable expenses incurred by such person in connection with the performance
of such person's duties as a director. Nothing contained in this Section 15
shall preclude any director from serving the Corporation or any of its
subsidiaries in any other capacity and receiving proper compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 1. EXECUTIVE COMMITTEE. The Board of Directors may, by
resolution adopted by a majority of the entire Board of Directors, designate
annually three or more of its members to constitute members or alternate members
of an Executive Committee, which Executive Committee shall have and may
exercise, between the members of the Board of Directors, all of the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, including, without limitation, if such Executive
Committee is so empowered and authorized by resolution adopted by a majority of
the entire Board of Directors, the power and authority to declare a dividend and
to authorize the issuance of stock, and may authorize the seal of the
Corporation to be affixed to all papers which may require it, except that such
Executive Committee shall not have such power or authority in reference to:
(a) amending the Certificate of Incorporation;
(b) adopting an agreement of merger or consolidation involving
the Corporation;
(c) recommending to the Stockholders the sale, lease or exchange
of all or substantially all of the property and assets of the Corporation;
(d) recommending to the Stockholders a dissolution of the
Corporation or a revocation of a dissolution;
(e) taking any action related to the approval or determination
of any matter in connection with any Business
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Combination (as such term is defined in the Certificate of Incorporation);
(f) filling vacancies on the Board of Directors or on any
committee of the Board of Directors, including, without limitation, the
Executive Committee; or
(g) amending or repealing any resolution of the Board of
Directors which by its terms may be amended or repealed only by the Board
of Directors.
The Board of Directors shall have the power at any time to change the membership
of the Executive Committee, to fill all vacancies in it and to discharge it,
either with or without cause.
SECTION 2. NOMINATING COMMITTEE. The Board of Directors may, by
resolution adopted by a majority of the entire Board of Directors, designate
annually three or more of its members to constitute members of a Nominating
Committee, a majority of which Nominating Committee shall be licensed
physicians, as available. The Nominating Committee shall have the exclusive
power to nominate persons, by a majority vote, on behalf of the Board of
Directors, to serve as directors of the Corporation.
SECTION 3. OTHER COMMITTEES. The Board of Directors may, by
resolution adopted by a majority of the entire Board of Directors, designate
from among its members one or more other committees, each of which shall have
such authority of the Board of Directors as may be specified in the resolution
of the Board of Directors designating such committee. A majority of all of the
members of such committee may determine its action and fix the time and place of
its meetings, unless the Board of Directors shall otherwise provide. The Board
of Directors shall have the power at any time to change the membership of, to
fill all vacancies in and to discharge any such committee, either with or
without cause.
SECTION 4. PROCEDURE; MEETING; QUORUM. Regular meetings of the
Executive Committee or of any other committee of the Board of Directors, of
which no notice shall be necessary, may be held at such times and places as
shall be fixed by resolution adopted by a majority of the members thereof.
Special meetings of the Executive Committee or any other committee of the Board
of Directors shall be called at the request of any member thereof. Notice of
each special meeting of the Executive Committee or of any other committee of the
Board of Directors shall be sent by mail, telegraph or telephone or delivered
personally to each
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member thereof not later than the calendar day before the day on which meeting
is to be held, but notice of any such special meeting need not be provided to
any such member who shall, either before or after such special meeting, submit a
signed waiver of such notice or who shall attend such meeting without
protesting, prior to or at its commencement, the lack of such notice to such
member. Any special meeting of the Executive Committee or any other committee
of the Board of Directors shall be a valid meeting without any notice thereof
having been provided if all of the members thereof shall be present thereat.
Notice of any adjourned meeting of any committee of the Board of Directors need
not be provided. The Executive Committee or any other committee of the Board of
Directors may adopt such rules and regulations not inconsistent with the
provisions of law, the Certificate of Incorporation or these Bylaws for the
conduct of its meetings as the Executive Committee or any other committee of the
Board of Directors may deem to be proper. A majority of the Executive Committee
or any other committee of the Board of Directors shall constitute a quorum for
the transaction of business at any meeting, and the vote of a majority of the
members thereof present at any meeting at which a quorum is present shall be the
act of such committee. The Executive Committee or any other committee of the
Board of Directors shall keep written minutes of its proceedings and shall
report on such proceedings to the Board of Directors.
ARTICLE V
OFFICERS
SECTION 1. NUMBER; TERM OF OFFICE. The officers of the Corporation
shall be a Chairman of the Board, a Chairman of the Executive Committee, if any,
a President, a Chief Financial Officer, one or more Vice-Presidents (one or more
of whom may be designated as Executive or Senior Vice-President), a Treasurer, a
Secretary and such other officers and agents with such titles and such duties as
the Board of Directors may from time to time determine, each to have such
authority, functions or duties as provided for in these Bylaws or as the Board
of Directors may from time to time determine and each to hold office for such
term as may be prescribed by the Board of Directors and until such officer's
successor shall have been chosen and shall qualify, or until such officer's
death or resignation, or until such officer's removal in the manner hereinafter
provided. The Chairman of the Board and the Chairman of the Executive
Committee, if any, shall be elected from among the directors of the Corporation.
One person may hold the offices and perform the duties of any two or more
officers of the Corporation; PROVIDED, HOWEVER, that no such officer shall
execute, acknowledge or verify any instrument in
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more than one capacity if such instrument is required by law, the Certificate of
Incorporation or these Bylaws to be executed, acknowledged or verified by two or
more officers of the Corporation. The Board of Directors may from time to time
authorize any officer of the Corporation to appoint and remove any other
subordinate officers and agents and to prescribe their powers, duties and terms
of office and removal. The Board of Directors may require any officer or agent
of the Corporation to provide security for the faithful performance of the
duties of such officer or agent, as the case may be.
SECTION 2. REMOVAL. Any officer of the Corporation may be removed,
either with or without cause, by the Board of Directors at any meeting thereof
called for such purpose or, except in the case of the Chairman of the Board, the
Chairman of the Executive Committee, the President, any Vice President, the
Secretary and the Chief Financial Officer of the Corporation and any other
officer of the Corporation elected by the Board of Directors, by any committee
or superior officer of the Corporation upon whom such power may be conferred by
the Board of Directors.
SECTION 3. RESIGNATION. Any officer of the Corporation may resign
at any time by giving notice to the Board of Directors or the Chairman of the
Board or the Secretary of the Corporation. Any such resignation shall take
effect at the date of receipt of such notice or at any later date specified
therein, but the acceptance of such resignation shall not be necessary to make
it effective.
SECTION 4. VACANCIES. A vacancy in any office of the Corporation
due to death, resignation, removal or any other cause may be filled for the
unexpired portion of the term of such office in the manner prescribed in these
Bylaws for election to such office.
SECTION 5. CHAIRMAN OF THE BOARD. The Chairman of the Board of the
Corporation shall, if present, preside at meetings of the Board of Directors
and, if present, preside at meetings of the Stockholders.
SECTION 6. THE PRESIDENT. The President of the Corporation shall
be the chief executive officer of the Corporation and, as such, shall have
responsibility for the general supervision and direction of the business and
affairs of the Corporation, subject only to the control of the Board of
Directors. The President of the Corporation shall perform such other duties as
the Board of Directors may from time to time determine.
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SECTION 7. VICE-CHAIRMAN OF THE BOARD. The Vice-Chairman of the
Board, if any, of the Corporation shall, as requested, counsel with and advise
the Chairman of the Board and other officers of the Corporation and shall
perform such other duties as the Board of Directors may from time to time
determine.
SECTION 8. CHAIRMAN OF THE EXECUTIVE COMMITTEE. The Chairman of
the Executive Committee, if any, shall, if present, preside at meetings of the
Executive Committee. Any Chairman of the Executive Committee shall, as
requested, counsel with and advise the Chairman of the Board and other officers
of the Corporation and shall perform such other duties as the Board of Directors
or the Executive Committee may from time to time determine.
SECTION 9. VICE-PRESIDENTS. Each Vice-President of the Corporation
shall have such powers and duties as shall be prescribed by the Chairman of the
Board of the Corporation or the Board of Directors.
SECTION 10. TREASURER. The Treasurer of the Corporation shall
perform all duties incident to the office of Treasurer and such other duties as
from time to time may be assigned thereto by the Chairman of the Board or the
Chief Financial Officer of the Corporation or the Board of Directors.
SECTION 11. SECRETARY. The Secretary of the Corporation shall
cause all notices required to be provided by the Corporation to be duly
provided. The Secretary of the Corporation shall be custodian of the seal of
the Corporation and shall affix such seal, or cause such seal to be affixed, to
all certificates evidencing capital stock of the Corporation (unless such seal
of the Corporation on such certificates shall be a facsimile, as hereinafter
provided) and to all other documents the execution of which on behalf of the
Corporation under its seal is duly authorized in accordance with the provisions
of these Bylaws. The Secretary of the Corporation shall have charge of the
stock ledger and also of the other books, records and papers of the Corporation
and shall cause the reports, statements and other documents required by law to
be properly kept and filed, and such Secretary shall in general perform all of
the duties incident to the office of Secretary and such other duties as from
time to time may be assigned thereto by the Chairman of the Board of the
Corporation or the Board of Directors.
SECTION 12. CHIEF FINANCIAL OFFICER. The Chief Financial Officer
of the Corporation shall perform all of the duties incident to such office and
such other duties as may from
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time to time be assigned thereto by the Chairman of the Board of the Corporation
or the Board of Directors.
SECTION 13. ASSISTANT TREASURERS AND SECRETARIES. The Assistant
Treasurers and Assistant Secretaries, if any, of the Corporation shall perform
such duties as shall be assigned thereto by the Treasurer or Secretary,
respectively, or by the Chairman of the Board or the Board of Directors.
SECTION 14. SALARIES. The salaries of the officers of the
Corporation shall be fixed from time to time by the Board of Directors, and no
officer of the Corporation shall be prevented from receiving such salary by
reason of the fact that such officer is also a director of the Corporation.
SECTION 15. DELEGATION OF DUTIES. In the case of the absence of
any officer of the Corporation or for any other reason which may seem sufficient
to the Board of Directors, the Board of Directors may, from time to time,
delegate the powers and duties, or any portion thereof of any officer of the
Corporation, to any other officer or to any director of the Corporation.
ARTICLE VI
INDEMNIFICATION
SECTION 1. DIRECTORS AND OFFICERS. The Corporation shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was a director or an officer of the Corporation, against expenses
(including, without limitation, attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred thereby in connection with
such action, suit or proceeding to the fullest extent permitted by and in the
manner set forth in the General Corporation Law of the State of Delaware and any
other applicable law as from time to time may be in effect. Such right of
indemnification shall not be deemed to be exclusive of any right to which any
such director or officer may otherwise be entitled. The foregoing provisions of
this Section 1 shall be deemed to be a contract between the Corporation and each
director and officer of the Corporation serving in such capacity at any time
while this Section 1 is in effect, and any repeal or modification thereof shall
not affect any right or obligation then existing, with respect to any state of
facts then or theretofore existing, or any action, suit or proceeding
theretofore or thereafter brought or threatened based in whole or in part upon
any such state of facts.
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SECTION 2. AGENTS AND EMPLOYEES. The Corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was an employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including, without limitation, attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred thereby
in connection with such action, suit or proceeding to the extent permitted by
and in the manner set forth in the General Corporation Law of the State of
Delaware and any other applicable law as from time to time may be in effect.
Such right of indemnification shall not be deemed to be exclusive of any other
right to which any such person otherwise may be entitled.
ARTICLE VII
CAPITAL STOCK
SECTION 1. CERTIFICATES FOR SHARES. Certificates evidencing shares
of capital stock of each class of the Corporation, whenever authorized by the
Board of Directors, shall be in such form as shall be approved by the Board of
Directors. The certificates evidencing shares of capital stock of each class
shall be signed by, or in the name of the Corporation by, the Chairman of the
Board or the President or a Vice President of the Corporation and by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer
of the Corporation, and sealed with the seal of the Corporation (which may be a
facsimile thereof). Any or all of such signatures may be facsimiles if
countersigned by a transfer agent or registrar. Even if any officer, transfer
agent or registrar whose manual or facsimile signature is affixed to any such
certificate ceases to be such officer, transfer agent or registrar before the
issuance of such certificate, such certificate may nevertheless be issued by the
Corporation with the same effect as if such officer, transfer agent or registrar
had not so ceased to be such officer, transfer agent or registrar, as the case
may be, at the date of such issuance. The stock ledger and blank share
certificates of the Corporation shall be kept by the Secretary of the
Corporation or by a transfer agent or registrar or by any other officer or agent
designated by the Board of Directors.
SECTION 2. TRANSFER OF SHARES. Transfers of shares of capital
stock of each class of the Corporation shall be made only on the books of the
Corporation by the holder thereof or by such
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holder's attorney thereunto authorized by a power of attorney duly executed and
filed with the Secretary of the Corporation or a transfer agent for such capital
stock, if any, and on surrender of the certificate or certificates evidencing
such shares properly endorsed or accompanied by a duly executed stock transfer
power and the payment of all taxes thereon. The person in whose name such
shares of capital stock stand on the books of the Corporation shall be deemed to
be the owner thereof for all purposes insofar as the Corporation is concerned;
PROVIDED, HOWEVER, that whenever any shares of capital stock shall be made for
effective transferral by the pledge of collateral security and written notice
thereof shall be provided to the Secretary such transfer agent, such fact shall
be described in the stock ledger entry for such transaction. No transfer of
shares of capital stock shall be valid as against the Corporation or the
Stockholders or the Corporation's creditors for any purpose (except to render
the transferee thereof liable for the debts of the Corporation to the extent
provided by law) until such transfer shall have been entered in the stock
records of the Corporation by an entry identifying the transferor and
transferee.
SECTION 3. ADDRESSES OF STOCKHOLDERS. Each Stockholder shall
designate to the Secretary or transfer agent of the Corporation an address at
which notices of meetings and all other corporate notices may be served or
mailed thereto, and, if any Stockholder shall fail to designate such address,
corporate notices may be served upon such Stockholder by mail directed thereto
at such Stockholder's post office address, if any, as such address appears on
the stock record books of the Corporation or at such Stockholder's last known
post office address.
SECTION 4. LOST, DESTROYED AND MUTILATED CERTIFICATES. The holder
of any share of capital stock of the Corporation shall immediately notify the
Corporation of any loss, theft, destruction or mutilation of the certificate
evidencing such share of capital stock. The Corporation may issue to such
holder a new certificate or certificates evidencing such share of capital stock,
upon the surrender of any such mutilated certificates or, in the case of loss,
theft or destruction of any such certificate, upon satisfactory proof of such
loss, theft or destruction. The Board of Directors, or a committee designated
thereby, or the transfer agents and registrars with respect to such capital
stock, may, in their discretion, require the owner of any such lost, stolen or
destroyed certificate, or such owner's legal representative, to give the
Corporation a bond in such sum and with such surety or sureties as directed
thereby to indemnify the Corporation and such transfer agents and registrars
against any claim that may be made
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on account of the alleged loss, theft or destruction of any such certificate or
the issuance of any such new certificate.
SECTION 5. REGULATIONS. The Board of Directors may make such
additional rules and regulations as it may deem to be expedient concerning the
issuance and transfer of certificates evidencing shares of capital stock of each
class of the Corporation and may make such rules and take such action as it may
deem to be expedient concerning the issuance of certificates in lieu of
certificates claimed to have been lost, destroyed, stolen or mutilated.
SECTION 6. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD.
In order that the Corporation may determine the Stockholders entitled to notice
of or to vote at any meeting of the Stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
or any right, or entitled to exercise any right in respect of any change,
conversion or exchange of capital stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than 60 days nor less than 10 days before the date of such meeting,
nor more than 60 days prior to any such other action. A determination of the
Stockholders entitled to notice or to vote at a meeting of the Stockholders
shall apply to any adjournment of such meeting; PROVIDED, HOWEVER, that the
Board of Directors may fix a new record date for any such adjourned meeting.
ARTICLE VIII
SEAL
The Board of Directors shall provide a corporate seal, which shall
be in the form of a circle and shall bear the full name of the Corporation and
such other words and figures as the Board of Directors may approve and adopt.
Such seal may be used by causing it or a facsimile thereof to be impressed or
affixed or in any other manner reproduced.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall end on the 31st day of
December of each year.
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ARTICLE X
WAIVER OF NOTICE
Whenever any notice whatsoever is required to be provided by these
Bylaws, by the Certificate of Incorporation or by law, the person entitled
thereto may, either before or after the meeting or other matter in respect of
which such notice is to be provided, waive such notice in writing, which writing
shall be filed with or entered upon the records of such meeting or the records
kept with respect to such other matter, as the case may be, and, in such event,
such notice need not be provided to such person and such waiver shall be deemed
to be equivalent to such notice.
ARTICLE XI
AMENDMENTS
The Board of Directors shall have the power to amend, alter or
repeal these Bylaws and to adopt new Bylaws from time to time by an affirmative
vote of a majority of the entire Board of Directors, as then constituted;
PROVIDED, HOWEVER, that notice of any proposal to make, amend, alter or repeal
these Bylaws must be included in the notice of the director's meeting at which
such action is to be voted upon. At the next Stockholders' meeting following
any such action by the Board of Directors, the Stockholders, by a majority vote
of those present and entitled to vote, shall have the power to alter or repeal
any Bylaws newly adopted by the Board of Directors or to restore to their
original status the Bylaws which the Board of Directors may have altered or
repealed; the notice of any such Stockholders' meeting shall include notice that
the Stockholders will be called on to ratify any action previously taken by the
Board of Directors with respect to the Bylaws.
ARTICLE XII
MISCELLANEOUS
SECTION 1. EXECUTION OF DOCUMENTS. The Board of Directors or any
committee thereof shall designate the officers, employees and agents of the
Corporation who shall have the power to execute and deliver deeds, contracts,
mortgages, bonds, debentures, notes, checks and other orders for the payment of
money and other documents for and in the name of the Corporation and may
authorize such officers, employees and agents to delegate such power (including,
without limitation, the authority to redelegate) by written instrument to other
officers, employees or agents of the Corporation. Such designation may be by
resolution or otherwise and the authority granted thereunder shall be general
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or confined to specific matters, all as the Board of Directors or any such
committee may determine. In the absence of such designation, the officers of
the Corporation shall have such power so referred to, to the extent incident to
the normal performance of their duties.
SECTION 2. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
or otherwise as selected by the Board of Directors or any committee thereof or
any officer of the Corporation to whom such power shall have been delegated by
the Board of Directors or any such committee.
SECTION 3. CHECKS. All checks, drafts and other orders for the
payment of money out of the funds of the Corporation, and all notes or other
evidences of indebtedness of the Corporation, shall be signed on behalf of the
Corporation in such manner as shall from time to time be determined by
resolution of the Board of Directors or of any committee thereof.
SECTION 4. STOCK IN OTHER CORPORATIONS. Any shares of capital
stock in any other corporation which may from time to time be held by the
Corporation may be represented and voted at any meeting of stockholders of such
corporation by the Chairman of the Board or the President or a Vice President of
the Corporation, or by any other person or persons thereunto authorized by the
Board of Directors, or by any proxy designated by written instrument of
appointment executed in the name of the Corporation by the Chairman of the Board
or the President or a Vice President of the Corporation. Shares of capital
stock belonging to the Corporation need not stand in the name of the Corporation
but may be held for the benefit of the Corporation in the individual name of the
Treasurer of the Corporation or of any other nominee designated for such purpose
by the Board of Directors. Certificates evidencing shares of capital stock so
held for the benefit of the Corporation shall be endorsed in blank or have
proper stock powers attached so that such certificates are at all times in due
form for transfer, and shall be held for safekeeping in such manner as shall be
determined from time to time by the Board of Directors.
SECTION 5. BYLAWS SUBJECT TO LAW AND CERTIFICATE OF INCORPORATION.
To the extent any provision of these Bylaws is inconsistent with any provision
contained in the Certificate of Incorporation or any applicable law as from time
to time may be in effect, such provision of these Bylaws shall be superseded by
such other provision for as long as such provisions are inconsistent; for all
other purposes, these Bylaws shall be in full force and effect.
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CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of Physician
Partners, Inc., a Delaware corporation (the "Corporation"); and
2. That the foregoing Bylaws constitute the Bylaws of the Corporation
as duly adopted by the Corporation's Board of Directors as of July 2, 1996.
IN WITNESS WHEREOF, I have executed this Certificate as of July 2, 1996.
/s/ Tim E. Dupell
----------------------------
Tim E. Dupell, Secretary
-21-
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NUMBER INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SHARES
- --0-- June 20, 1996 --0--
PHYSICIAN PARTNERS, INC.
AUTHORIZED:100,000,000 SHARES
50,000,000 SHARES COMMON STOCK
- -------------------------------------- 50,000,000 SHARES PREFERRED STOCK
20,000,000 SHARES CLASS A COMMON STOCK $.01 PAR VALUE EACH
$.01 PAR VALUE EACH
30,000,000 SHARES CLASS B COMMON STOCK
$.01 PAR VALUE EACH
THIS CERTIFIES THAT ***S*P*E*C*I*M*E*N*********** IS THE REGISTERED HOLDER
----------------------------------
OF ***************** SHARES OF THE CLASS A COMMON STOCK OF
-----------------
PHYSICIAN PARTNERS, INC.
HEREINAFTER DESIGNATED "THE CORPORATION", TRANSFERABLE ON THE SHARE REGISTER OF
THE CORPORATION UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED OR
ASSIGNED.
CLASS "A"
This certificate and the shares represented thereby shall be held subject
to all of the provisions of the Certificate of Incorporation and the By-laws of
said Corporation, a copy of each of which is on file at the office of the
Corporation, and made a part hereof as fully as though the provisions of said
Certificate of Incorporation and By-laws were imprinted in full on this
certificate, to all of which the holder of this certificate, by acceptance
hereof, assents and agrees to be bound.
Any stockholder may obtain from the principal office of the Corporation,
upon request and without charge, a statement of the number of shares
constituting each class or series of stock and the designation thereof; and a
copy of the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights and the By-laws.
WITNESS THE SEAL OF THE CORPORATION AND THE SIGNATURES OF ITS DULY
AUTHORIZED OFFICERS.
DATED:
- --------------------------- -----------------------------
SECRETARY PRESIDENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE SHARES OF CAPITAL STOCK OF PHYSICIAN PARTNERS, INC. (THE "COMPANY")
EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND
MAY NOT BE OFFERED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF UNLESS AND UNTIL REGISTERED UNDER THE ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR UNLESS COUNSEL TO THE HOLDER OF SUCH SHARES PROVIDES
A WRITTEN OPINION IN FORM SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT
SUCH OFFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION, TRANSFER OR OTHER
DISPOSITION IS EXEMPT FROM REGISTRATION OR IS OTHERWISE IN COMPLIANCE WITH
THE ACT AND SUCH LAWS.
THE SHARES OF CAPITAL STOCK OF THE COMPANY EVIDENCED BY THIS CERTIFICATE ARE
ALSO SUBJECT TO RESTRICTIONS ON TRANSFER AND OTHER CONDITIONS SET FORTH IN A
RESTRICTED STOCK AGREEMENT ENTERED INTO AS OF OCTOBER 30, 1996, COPIES OF
WHICH ARE ON FILE AT THE OFFICE OF THE COMPANY AND WILL BE FURNISHED WITHOUT
CHARGE TO THE HOLDER OF SUCH SHARES UPON WRITTEN REQUEST.
<PAGE>
COMMERCIAL GUARANTY
- --------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
12619
- --------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- --------------------------------------------------------------------------------
BORROWER: HEALTHCARE PARTNERS, LLC, LENDER: UNITED STATES NATIONAL BANK OF
an Oregon limited liability OREGON
company Commercial Real Estate Loan
3680 NW Samaritan Drive Administration
Corvallis, OR 97330 501 S.E. Hawthorne Blvd.,
Fifth Floor
P.O. Box 6375
Portland, OR 97228-6375
GUARANTOR: THE CORVALLIS CLINIC, P.C.
3680 NW Samaritan Drive
Corvallis, OR 97330
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMOUNT OF GUARANTY. The amount of this Guaranty is Unlimited.
CONTINUING UNLIMITED GUARANTY. For good and valuable consideration, THE
CORVALLIS CLINIC, P.C. ("Guarantor") absolutely and unconditionally guarantees
and promises to pay to UNITED STATES NATIONAL BANK OF OREGON ("Lender") or its
order, in legal tender of the United States of America, the Indebtedness (as
that term is defined below) of HEALTHCARE PARTNERS, LLC, an Oregon limited
liability company ("Borrower") to Lender on the terms and conditions set forth
in this Guaranty. Under this Guaranty, the liability of Guarantor is unlimited
and the obligations of Guarantor are continuing.
DEFINITIONS. The following words shall have the following meanings when used in
this Guaranty:
BORROWER. The work "Borrower" means HEALTHCARE PARTNERS, LLC, an Oregon
limited liability company.
GUARANTOR. The word "Guarantor" means THE CORVALLIS CLINIC, P.C.
GUARANTY. The word "Guaranty" means this Guaranty made by Guarantor for
the benefit of Lender dated May 24, 1995.
INDEBTEDNESS. The word "Indebtedness" is used in its most comprehensive
sense and means and includes any and all of Borrower's liabilities,
obligations, debts, and indebtedness to Lender, now existing or hereinafter
incurred or created, including, without limitation, all loans, advances,
interest, costs, debts, overdraft indebtedness, credit card indebtedness,
lease obligations, other obligations, and liabilities of Borrower, or any
of them, and any present or future judgments against Borrower, or any of
them; and whether any such Indebtedness is voluntarily or involuntarily
incurred, due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined; whether Borrower may be liable
individually or jointly with others, or primarily or secondarily, or as
guarantor or surety; whether recovery on the Indebtedness may be or may
become barred or unenforceable against Borrower for any reason whatsoever;
and whether the Indebtedness arises from transactions which may be voidable
on account of infancy, insanity, ultra vires, or otherwise.
LENDER. The word "Lender" means UNITED STATES NATIONAL BANK OF OREGON, its
successors and assigns.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
NATURE OF GUARANTY. Guarantor's liability under this Guaranty shall be open and
continuous for so long as this Guaranty remains in force. Guarantor intends to
guarantee at all times the performance and prompt payment when due, whether at
maturity or earlier by reason of acceleration or otherwise, of all Indebtedness.
Accordingly, no payments made upon the Indebtedness will discharge or diminish
the continuing liability of Guarantor in connection with any remaining portions
of the Indebtedness or any of the Indebtedness which subsequently arises or is
thereafter incurred or contracted.
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness incurred or
contracted before receipt by Lender of any notice of revocation shall have been
fully and finally paid and satisfied and all other obligations of Guarantor
under this Guaranty shall have been performed in full. If Guarantor elects to
revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written
notice of revocation must be delivered to Lender at the address of Lender listed
above or such other place as Lender may designate in writing. Written
revocation of this Guaranty will apply only to advances or new Indebtedness
created after actual receipt by Lender of Guarantor's written revocation. For
this purpose and without limitation, the term "new Indebtedness" does not
include Indebtedness which at the time of notice of revocation is contingent,
unliquidated, undetermined or not due and which later becomes absolute,
liquidated, determined or due. This Guaranty will continue to bind Guarantor
for all Indebtedness incurred by Borrower or committed by Lender prior to
receipt of Guarantor's written notice of revocation, including any extensions,
renewals, substitutions or modifications of the Indebtedness. All renewals,
extensions, substitutions, and modifications of the Indebtedness granted after
Guarantor's revocation, are contemplated under this Guaranty and, specifically
will not be considered to be new Indebtedness. This Guaranty shall bind the
estate of Guarantor as to Indebtedness created both before and after the death
or incapacity of Guarantor, regardless of Lender's actual notice of Guarantor's
death. Subject to the foregoing, Guarantor's executor or administrator or other
legal representative may terminate this Guaranty in the same manner in which
Guarantor might have terminated it and with the same effect. Release of any
other guarantor or termination of any other guaranty of the Indebtedness shall
not affect the liability of Guarantor under this Guaranty. A revocation
received by Lender from any one or more Guarantors shall not affect the
liability of any remaining Guarantors under this Guaranty. It is anticipated
that fluctuations may occur in the aggregate amount of Indebtedness covered by
this Guaranty, and it is specifically acknowledged and agreed by Guarantor that
reductions in the amount of Indebtedness, even to zero dollars ($0.00), prior to
written revocation of this Guaranty by Guarantor shall not constitute a
termination of this Guaranty. This Guaranty is binding upon Guarantor and
Guarantor's heirs, successors and assigns so long as any of the guaranteed
Indebtedness remains unpaid and even though the Indebtedness guaranteed may from
time to time be zero dollars ($0.00).
GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before
or after any revocation hereof, without notice or demand and without lessening
Guarantor's liability under this Guaranty, from time to time: (a) prior to
revocation as set forth above, to make one or more additional secured or
unsecured loans to Borrower, to lease equipment or other goods to Borrower, or
otherwise to extend additional credit to Borrower; (b) to alter, compromise,
renew, extend, accelerate, or otherwise change one or more times the time for
payment or other terms of the Indebtedness or any part of the Indebtedness,
including increases and decreases of the rate of interest on the Indebtedness;
extensions may be repeated and may be for longer than the original loan term;
(c) to take and hold security for the payment of this Guaranty or the
Indebtedness, and exchange, enforce, waive, fail or decide not to perfect, and
release any such security, with or without the substitution of new collateral;
(d) to release, substitute, agree not to sue, or deal with any one or more of
Borrower's sureties, endorsers, or other guarantors on any terms or in any
manner Lender may choose; (e) to determine how, when and what application of
payments and credits shall be made on the Indebtedness; (f) to apply such
security and direct the order or manner of sale thereof, including without
limitation, any nonjudicial sale permitted by the terms of the controlling
security agreement or deed of trust, as Lender in its discretion may
<PAGE>
05-24-1995 COMMERCIAL GUARANTY PAGE 2
(CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
determine; (g) to sell, transfer, assign, or grant participations in all or any
part of the Indebtedness; and (h) to assign or transfer this Guaranty in whole
or in part.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants
to Lender that (a) no representations or agreements of any kind have been made
to Guarantor which would limit or qualify in any way the terms of this Guaranty;
(b) this Guaranty is executed at Borrower's request and not at the request of
Lender; (c) Guarantor has not and will not, without the prior written consent of
Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise
dispose of all or substantially all of Guarantor's assets, or any interest
therein; (d) Lender has made no representation to Guarantor as to the
creditworthiness of Borrower; (e) upon Lender's request, Guarantor will provide
to Lender financial and credit information in form acceptable to Lender, and all
such financial information provided to Lender is true and correct in all
material respects and fairly presents the financial condition of Guarantor as of
the dates thereof, and no material adverse change has occurred in the financial
condition of Guarantor since the date of the financial statements; and (f)
Guarantor has established adequate means of obtaining from Borrower on a
continuing basis information regarding Borrower's financial condition.
Guarantor agrees to keep adequately informed from such means of any facts,
events, or circumstances which might in any way affect Guarantor's risks under
this Guaranty, and Guarantor further agrees that, absent a request for
information, Lender shall have no obligation to disclose to Guarantor any
information or documents acquired by Lender in the course of its relationship
with Borrower. Lender agrees to keep Guarantors financial information
confidential.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender (a) to continue lending money or to extend other
credit to Borrower; (b) to make any presentment, protest, demand, or notice of
any kind, including notice of any nonpayment of the Indebtedness or of any
nonpayment related to any collateral, or notice of any action or nonaction on
the part of Borrower, Lender, any surety, endorser, or other guarantor in
connection with the Indebtedness or in connection with the creation of new or
additional loans or obligations; (c) to resort for payment or to proceed
directly or at once against any person, including Borrower or any other
guarantor; (d) to proceed directly against or exhaust any collateral held by
Lender from Borrower, any other guarantor, or any other person; (e) to give
notice of the terms, time, and place of any public or private sale of personal
property security held by Lender from Borrower or to comply with any other
applicable provisions of the Uniform Commercial Code; (f) to pursue any other
remedy within Lender's power; or (g) to commit any act or omission of any kind,
or at any time, with respect to any matter whatsoever.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right to
payment Guarantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at no time shall Guarantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
Guarantor also waives any and all rights or defenses arising by reason of (a)
any "one action" or "anti-deficiency" law or any other law which may prevent
Lender from bringing any action, including a claim for deficiency, against
Guarantor, before or after Lender's commencement or completion of any
foreclosure action, either judicially or by exercise of a power of sale; (b) any
election of remedies by Lender which destroys or otherwise adversely affects
Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower
for reimbursement, including without limitation, any loss of rights Guarantor
may suffer by reason of any law limiting, qualifying, or discharging the
Indebtedness; (c) any disability or other defense of Borrower, of any other
guarantor, or of any other person, or by reason of the cessation of Borrower's
liability from any cause whatsoever, other than payment in in legal tender, of
the Indebtedness; (d) any right to claim discharge of the Indebtedness on the
basis of unjustified impairment of any collateral for Indebtedness; (e) any
statute of limitations, if at any time any action or suit brought by Lender
against Guarantor is commenced there is outstanding Indebtedness of Borrower to
Lender which is not barred by any applicable statute of limitations; or (f) any
defenses given to guarantors at law or in equity other than actual payment and
performance of the Indebtedness. If payment is made by Borrower, whether
voluntarily or otherwise, or by any third party, on the Indebtedness and
thereafter Lender is forced to remit the amount of that payment to Borrower's
trustee in bankruptcy or to any similar person under any federal or state
bankruptcy law or law for the relief of debtors, the Indebtedness shall be
considered unpaid for the purpose of enforcement of this Guaranty.
Guarantor further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of setoff,
counterclaim, counter demand, recoupment or similar right, whether such claim,
demand or right may be asserted by the Borrower, the Guarantor, or both.
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and
agrees that each of the waivers set forth above is made with Guarantor's full
knowledge of its significance and consequences and that, under the
circumstances, the waivers are reasonable and not contrary to public policy or
law. If any such waiver is determined to be contrary to any applicable law or
public policy, such waiver shall be effective only to the extent permitted by
law or public policy.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff
against the moneys, securities or other property of Guarantor given to Lender by
law, Lender shall have, with respect to Guarantor's obligations to Lender under
this Guaranty and to the extent permitted by law, a contractual possessory
security interest in and a right of setoff against, and Guarantor hereby
assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor's
right, title and interest in and to, all deposits, moneys, securities and other
property of Guarantor now or hereafter in the possession of or on deposit with
Lender, whether held in a general or special account or deposit, whether held
jointly with someone else, or whether held for safekeeping or otherwise,
excluding however all IRA, Keogh, and trust accounts. Every such security
interest and right of setoff may be exercised without demand upon or notice to
Guarantor. No security interest or right of setoff shall be deemed to have been
waived by any act or conduct on the part of Lender or by any neglect to exercise
such right of setoff or to enforce such security interest or by any delay in so
doing. Every right of setoff and security interest shall continue in full force
and effect until such right of setoff or security interest is specifically
waived or released by an instrument in writing executed by Lender.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets
of Borrower, through bankruptcy, by an assignment for the benefit of creditors,
by voluntary liquidation, or otherwise, the assets of Borrower applicable to the
payment of the claims of both Lender and Guarantor shall be paid to Lender and
shall be first applied by Lender to the Indebtedness of Borrower to Lender.
Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower;
provided however, that such assignment shall be effective only for the purpose
of assuring to Lender full payment in legal tender of the Indebtedness. If
Lender so requests, any notes or credit agreements now or hereafter evidencing
any debts or obligations of Borrower, Guarantor shall be marked with a legend
that the same are subject to this Guaranty and shall be delivered to Lender.
Guarantor agrees, and Lender hereby is authorized, in the name of Guarantor,
from time to time to execute and file financing statements and continuation
statements and to execute such other documents and to take such other actions as
Lender deems necessary or appropriate to perfect, preserve and enforce its
rights under this Guaranty.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:
AMENDMENTS. This Guaranty, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Guaranty. No alteration of or amendment to this
Guaranty shall be effective unless given in writing and signed by the party
<PAGE>
05-24-1995 COMMERCIAL GUARANTY PAGE 3
(CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
or parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Guaranty has been delivered to Lender and accepted by
Lender in the State of Oregon. If there is a lawsuit, Guarantor agrees
upon Lender's request to submit to the jurisdiction of the courts of
Multnomah County, State of Oregon. Subject to the provisions on
arbitration, this Guaranty shall be governed by and construed in accordance
with the laws of the State of Oregon.
ARBITRATION. LENDER AND GUARANTOR AGREE THAT ALL DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE,
ARISING FROM THIS GUARANTY OR OTHERWISE, INCLUDING WITHOUT LIMITATION
CONTRACT AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF
THE AMERICAN ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act
to take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; foreclosing by notice and sale under any deed of trust
or mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any
party. Judgment upon any award rendered by any arbitrator may be entered
in any court having jurisdiction. Nothing in this Guaranty shall preclude
any party from seeking equitable relief from a court of competent
jurisdiction. The statute of limitations, estoppel, waiver, laches, and
similar doctrines which would otherwise be applicable in an action brought
by a party shall be applicable in any arbitration proceeding, and the
commencement of an arbitration proceeding shall be deemed the commencement
of an action for these purposes. The Federal Arbitration Act shall apply
to the construction, interpretation, and enforcement of this arbitration
provision.
ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Guaranty.
Lender may pay someone else to help enforce this Guaranty, and Guarantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Guarantor also shall pay all court costs and such additional
fees as may be directed by the court.
NOTICES. Except for revocation notices by Guarantor, all notices required
to be given by either party to the other under this Guaranty shall be in
writing and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier, or when deposited in the
United States mail, first class postage prepaid, addressed to the party to
whom the notice is to be given at the address shown above or to such other
addresses as either party may designate to the other in writing. All
revocation notices by Guarantor shall be in writing and shall be effective
only upon delivery to Lender as provided above in the section titled
"DURATION OF GUARANTY." If there is more than one Guarantor, notice to any
Guarantor will constitute notice to all Guarantors. For notice purposes,
Guarantor agrees to keep Lender informed at all times of Guarantor's
current address.
INTERPRETATION. In all cases where there is more than one Borrower or
Guarantor, then all words used in this Guaranty in the singular shall be
deemed to have been used in the plural where the context and construction
so require; and where there is more than one Borrower named in this
Guaranty or when this Guaranty is executed by more than one Guarantor, the
words "Borrower" and "Guarantor" respectively shall mean all and any one or
more of them. The words "Guarantor," "Borrower," and "Lender" include the
heirs, successors, assigns, and transferees of each of them. Caption
headings in this Guaranty are for convenience purposes only and are not to
be used to interpret or define the provisions of this Guaranty. If a court
of competent jurisdiction finds any provision of this Guaranty to be
invalid or unenforceable as to any person or circumstance, such finding
shall not render that provision invalid or unenforceable as to any other
persons or circumstances, and all provisions of this Guaranty in all other
respects shall remain valid and enforceable. If any one or more of
Borrower or Guarantor are corporations or partnerships, it is not necessary
for Lender to inquire into the powers of Borrower or Guarantor or of the
officers, directors, partners, or agents acting or purporting to act on
their behalf, and any indebtedness made or created in reliance upon the
professed exercise of such powers shall be guaranteed under this Guaranty.
WAIVER. Lender shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Guaranty shall not prejudice or constitute a waiver
of Lender's right otherwise to demand strict compliance with that provision
or any other provision of this Guaranty. No prior waiver by Lender, nor
any course of dealing between Lender and Guarantor, shall constitute a
waiver of any of Lender's rights or of any of Guarantor's obligations as to
any future transactions. Whenever the consent of Lender is required under
this Guaranty, the granting of such consent by Lender in any instance shall
not constitute continuing consent to subsequent instances where such
consent is required and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS
GUARANTY IS DATED MAY 24, 1995.
GUARANTOR:
X Steven V. Neville
---------------------------
THE CORVALLIS CLINIC, P.C.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.19(c) 1995 CFI ProServices, Inc.
All rights reserved [OR-E20 HEALTH.LN R10.OVL]
<PAGE>
EXHIBIT 4.3
November 6, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Undertaking by Physician Partners, Inc. to Furnish
Instruments Regarding Long-Term Debt
--------------------------------------------------
Ladies and Gentlemen:
This letter is in reference to the merger of HealthFirst Medical Group,
P.C., The Corvallis Clinic, P.C. and Medford Clinic, P.C. with and into
Physician Partners, Inc. ("PPI"). PPI is filing with the Securities and
Exchange Commission (the "SEC") a Registration Statement on Form S-4 in
connection with such merger. PPI has an obligation to disclose certain
instruments defining the rights of security holders under Item 21 of Form S-4
and paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K. Pursuant to such
regulations, PPI hereby undertakes to furnish to the SEC upon request any
instrument with respect to long-term debt thereof, the total amount of which
does not exceed 10 percent of the total assets of PPI.
PHYSICIAN PARTNERS, INC.
By: /s/ Tim E. Dupell
_______________________
Tim E. Dupell
Chief Financial Officer
<PAGE>
EXHIBIT 5.1
November 6, 1996
Physician Partners, Inc.
111 SW Columbia Street
Suite 725
Portland, Oregon 97201
Gentlemen:
We have acted as counsel to Physician Partners, Inc. (the "Company"),
and, at the Company's request, have examined the Registration Statement on
Form S-4 (the "Registration Statement") as filed with the Securities and
Exchange Commission on November 6, 1996, in connection with the registration
under the Securities Act of 1933, as amended, of 6,500,250 shares of Class A
Common Stock, par value $.01 per share (the "Shares"), issuable by the
Company in connection with the merger described in the Joint Proxy
Statement/Prospectus (the "Prospectus") constituting a part of the
Registration Statement.
As such counsel, we have examined such documents and records of the
Company as we deemed necessary as a basis for the opinion set forth herein,
and we are familiar with actions anticipated to be taken by the Company in
connection with the authorization and issuance of the Shares.
Based on such examination and subject to compliance with applicable
state securities laws, we are of the opinion that the Shares, when issued by
the Company in the manner described in the Prospectus, will be legally
issued, fully paid and nonassessable.
We consent to the use of this opinion as an Exhibit to the Registration
Statement and to the reference to the undersigned appearing under the caption
"Legal Matters" in the Prospectus.
Sincerely,
McDermott, Will & Emery
<PAGE>
[LETTERHEAD]
November 6, 1996
Physician Partners, Inc.
111 SW Columbia Street
Suite 725
Portland, Oregon 97201
Attention: David Goldberg
HealthFirst Medical Group, P.C.
10535 N.E. Glisan
Portland, Oregon 97220
Attention: Jerry Erstgaard
The Corvallis Clinic, P.C.
444 NW Elks Drive
Corvallis, Oregon 97330
Attention: David Kobriger
Medford Clinic, P.C.
555 Black Oak Drive
Medford, OR 97504
Attention: Jon Ness
Gentlemen:
We have acted as special counsel to HealthFirst Medical
Group, P.C., an Oregon professional corporation ("HealthFirst"),
The Corvallis Clinic, P.C., an Oregon professional corporation
("Corvallis Clinic"), and Medford Clinic, P.C., an Oregon
professional corporation ("Medford Clinic" and, together with
HealthFirst and Corvallis Clinic, referred to herein,
collectively, as the "Companies"), and Physician Partners, Inc., a
Delaware corporation ("PPI"), in connection with the merger of
each of HealthFirst, Corvallis Clinic and Medford Clinic with and
into PPI (the "Merger"), pursuant to the Amended and Restated
Agreement and Plan of Reorganization and Merger, dated as of
September 19, 1996, as amended on November 4, 1996, among the
Companies and PPI (the "Reorganization and Merger Agreement").
Capitalized terms used but not defined herein shall be used herein
as defined in the Reorganization and Merger Agreement.
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November 6, 1996
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In that connection, you have requested our opinion
regarding certain Federal income tax consequences of the Merger.
In formulating our opinion, we have examined the Reorganization
and Merger Agreement, the Joint Proxy Statement/Prospectus (the
"Proxy Statement") of the Companies and PPI in substantially the
form to be delivered to respective shareholders of the Company and
such other documents as we deem relevant for purposes of this
opinion. In addition, we have assumed that (i) the Merger will be
consummated in the manner contemplated by the Proxy Statement and
in accordance with the provisions of the Reorganization and Merger
Agreement, (ii) the statements concerning the Merger set forth in
the Proxy Statement (including the purposes of the parties for
consummating the Merger) are accurate and complete and (iii) the
representations made to us by PPI, HealthFirst, Corvallis Clinic
and Medford Clinic in the respective Officer's Certificates, each
dated November 3, 1996, and delivered to us for purposes of this
opinion, are accurate.
Based upon the foregoing, we are of the opinion that,
for Federal income tax purposes, it is more likely than not that:
i. the Merger will constitute a reorganization within
the meaning of Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended (the "Code"), and
PPI, HealthFirst, Corvallis Clinic and Medford
Clinic will each be a party to such reorganization
within the meaning of Section 368(b) of the Code;
ii. no gain or loss will be recognized by the Companies
or PPI in connection with the Merger;
iii. no gain or loss will be recognized by the
shareholders of any of the Companies upon their
receipt of shares of PPI Class A Common Stock in
exchange for their shares of capital stock of
HealthFirst, Corvallis Clinic or Medford Clinic, as
the case may be;
iv. the tax basis of the shares of PPI Class A Common
Stock received by the shareholders of HealthFirst,
Corvallis Clinic and Medford Clinic will be the
same as the tax basis of the capital stock in
HealthFirst, Corvallis Clinic and Medford Clinic,
as the case may be, exchanged therefor; and
v. the holding period of PPI Class A Common Stock in
the hands of the shareholders of HealthFirst,
Corvallis Clinic and Medford Clinic will include
the holding period of the capital stock in
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November 6, 1996
Page 3
HealthFirst, Corvallis Clinic and Medford Clinic,
as the case may be, exchanged therefor.
You should note that our opinion is based upon the facts
presented to us, including the representations made to us in the
Officer's Certificates, each dated November 3, 1996. Any changes
therein at or subsequent to the date hereof may necessitate a
reconsideration of our opinion and, possibly, a different
conclusion. Furthermore, our opinion is based on the current
Code, Treasury Regulations and other authorities. These
authorities are subject to change, perhaps retroactively.
Finally, we express no opinion as to the tax consequences of the
PC Reorganizations (including the HealthFirst Distribution, the
Corvallis Clinic Distribution and the Medford Clinic Distribution)
as contemplated in the Reorganization and Merger Agreement,
including whether the PC Reorganizations qualify as
reorganizations under Sections 368(a)(1)(D) and 355 of the Code.
Very truly yours,
McDermott, Will & Emery
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EXECUTION COPY
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), is made
and entered into as of the 19th day of September, 1996, effective as of July 1,
1996, by and between Physician Partners, Inc., a Delaware corporation (the
"Company"), and David M. Goldberg (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive and the Company have entered into the Employment
Agreement, dated as of July 29, 1996 (the "Old Employment Agreement"), effective
as of July 1, 1996, providing for the Company's employment of the Executive; and
WHEREAS, the Executive and the Company deem it to be in their respective
best interests to amend and restate the Old Employment Agreement upon the terms
and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and agreements contained herein, it is hereby agreed as follows:
1. DUTIES. The Company hereby agrees to employ Executive as its
President and Chief Executive Officer for the "Term of Employment" (as herein
defined). Executive in this capacity agrees to use his best efforts during the
Term of Employment to protect, encourage, and promote the interests of the
Company. During the Term of Employment, Executive shall also perform such other
duties consistent with the offices held by Executive as may be reasonably
assigned to him from time to time by the Board of Directors of the Company, and
will devote substantial time and attention to such duties, except while on sick
leave, reasonable vacations, and excused leaves of absence. During such period,
Executive may also be required to perform services for one or more affiliates of
the Company.
2. COMPENSATION.
(a) BASE SALARY. From July 1, 1996 until the consummation of the
merger of the Company with the Corvallis Clinic, P.C., HealthFirst Medical
Group, P.C. and Medford Clinic, P.C. (the "Merger") the Company agrees to pay to
Executive base salary at an annual rate of three hundred thousand dollars
($300,000) payable in regular installments in accordance with the Company's
normal payroll procedures. Effective on the date the Merger is consummated (the
"Merger Date"), the Company agrees to pay to Executive a minimum base salary
during the Term of Employment equal to two hundred twenty-five thousand dollars
($225,000) per year ("Base Salary"), payable in regular installments in
accordance with the Company's normal payroll procedures. Executive's Base
Salary shall be increased at the discretion of the Compensation Committee of the
Board of Directors of the Company (the "Committee") to maintain or bring
Executive to the 35th percentile of peer companies selected by the Committee.
(b) ANNUAL INCENTIVE. Executive shall not be entitled to a bonus
award for any period prior to the Merger. However, effective on the Merger
Date, Executive will be eligible to participate in the Company's annual
management incentive plan (or such other incentive plan established in place of
the Company's annual management incentive plan) at a target bonus equal to such
percentage of Base Salary as determined each year by the Committee in its
discretion. The actual amount of the annual bonus award, if any, for a fiscal
year shall be dependent upon the achievement of certain financial standards of
performance for the operations of the Company, the achievement of certain non-
financial objectives mutually agreed upon by Executive and the Company at the
beginning of the fiscal year and a discretionary component for performance above
targets. For the 1997 fiscal year, the incentive standards and target goals for
Executive shall be mutually agreed upon by Executive and the Company within
sixty (60) days after the Merger Date and Executive shall be entitled to receive
a bonus award not less than one hundred twenty-five thousand dollars ($125,000)
assuming achievement of the financial standards of performance and 100% of the
agreed upon non-financial objectives. No bonus award for the 1997 fiscal year
shall be awarded if Executive fails to achieve at least 85% of the agreed upon
non-financial objectives. The Committee will review Executive's performance
from time to time and assuming satisfactory performance, additional bonus awards
as the Committee may determine in its sole discretion shall be made sufficient
to maintain Executive's short-term compensation package (i.e, Base Salary plus
annual bonus awards) at a level equal to the 60th percentile of peer companies
selected by the Committee.
(c) LONG-TERM INCENTIVES. As soon as practicable after the date
hereof, Executive shall receive a restricted stock award for 27,000 shares of
Class A Common Stock, par value $0.01 per share ("Class A Common Stock"), of the
Company. One-third (1/3) of the restricted shares so awarded shall vest and the
risk of forfeiture on such shares shall lapse as of each of the first, second
and third anniversaries of the Merger Date, provided that Executive is still
employed on each such anniversary. In addition, effective on the Merger Date,
Executive shall be granted an option to purchase 50,000 shares of Class A Common
Stock of the Company at the fair market value of a share of Class A Common Stock
of the Company as of the date such option is granted. The option shall vest and
become exercisable with respect to twenty percent (20%) of the shares subject to
the option on each anniversary of the date the option is granted. The
restricted stock award and the option grant specified above shall be subject to
such other terms and conditions as may be specified in a separate agreement
providing for the award or grant, as the case may be, and the terms and
conditions relating to such award or grant, including, without limitation,
restriction on transfer of shares, vesting requirements and forfeiture, and
redemption of shares. The Committee will review Executive's performance from
time to time and assuming satisfactory performance, additional awards of long
term incentives, in such form and in such amounts as the Committee may determine
in its sole discretion, shall be made sufficient to maintain Executive's total
compensation (i.e Base Salary, annual bonus awards and long-term incentives) at
a level that is within the 60th to 70th percentile of compensation ranges for
peer companies selected by the Committee.
3. BENEFITS. During the Term of Employment:
(a) The Company shall furnish Executive with, and Executive shall be
allowed full use of, office facilities, automobiles, secretarial and clerical
assistance, and other Company property and services of a quality, nature and to
the extent made available to senior executive employees of the Company from time
to time;
(b) Executive shall be eligible to participate in life, health, long-
term disability insurance and severance programs, stock purchase programs, stock
option plans, qualified and non-qualified pension and retirement plans,
incentive compensation programs and other fringe benefit programs, if any,
available to other senior executive employees of the Company and physicians
employed by medical clinics that are party to a practice management agreement
with the Company or any Subsidiary thereof;
(c) Executive shall be allowed 4 weeks of vacation and paid leaves of
absence on the same basis as other senior executive employees of the Company;
(d) Company will reimburse Executive for reasonable business expenses
in performing Executive's duties and promoting the business of Company,
including, without limitation, reasonable entertaining expenses, automobile
expenses, and travel and lodging, when incurred. The cost of these items shall
be borne by the Company upon presentation of an itemized expense voucher;
(e) The Company shall provide the Executive with a car allowance of
$1,000 per month and customary support, such as a cellular phone and laptop
computer; and
(f) Company shall reimburse Executive for reasonable and documented
relocation expenses that would otherwise be deductible by Executive.
4. TERM OF EMPLOYMENT. As used herein, the phrase "Term of Employment"
shall mean the period commencing on July 1, 1996 and ending June 30, 1999. The
Company shall provide Executive with at least ninety (90) days notice of its
intent not to renew this Agreement. Notwithstanding the foregoing, the Term of
Employment shall expire on the first to occur of the following:
(a) TERMINATION WITHOUT CAUSE. Notwithstanding anything to the
contrary in this Agreement, whether express or implied, the Company may at any
time terminate Executive's employment with the Company by giving Executive at
least sixty (60) days prior written notice of the effective date of termination.
In the event of such termination, Executive shall be entitled to receive his
Base Salary (at the rate in effect immediately prior to such notice) during the
period commencing on the effective date of such termination and ending on the
first anniversary of such date (the "Severance Period") as though Executive's
employment had continued during the Severance Period. Executive shall also be
entitled to continue to be covered by all medical, health and accident and
disability insurance, at the same coverage level maintained for Executive's
benefit immediately prior to the date of Executive's termination, until the end
of the Severance Period. In the event Executive is ineligible under the terms
of such insurance to continue to be so covered, the Company shall provide
Executive with substantially equivalent coverage through other sources or will
provide the Executive with a lump sum payment equal to the agreed upon present
value of the continuation of such insurance coverages to which Executive is
entitled under this section 4(a).
(b) TERMINATION FOR CAUSE. The Company shall have the right to
terminate Executive's employment at any time for Cause by giving Executive
written notice of the effective date of termination (which effective date may,
except as otherwise provided below, be the date of such notice). For purposes
of this Agreement, Cause shall mean:
(i) fraud, misappropriation, embezzlement or other act of
material misconduct against the Company or any of its affiliates thereof or an
act contrary to their best interests;
(ii) substantial and willful failure to render services in
accordance with the terms of this Agreement, provided that (A) a demand for
performance of services had been delivered to the Executive by the Board of
Directors of the Company at least thirty (30) days prior to termination
identifying the manner in which such Chief Executive Officer believes that the
Executive has failed to perform and (B) the Executive has thereafter failed to
remedy such failure to perform;
(iii) willful and knowing violation of any rules or regulations
of any governmental or regulatory body material to the business of the Company;
or
(iv) conviction of or plea of guilty or nolo contendere to a
felony.
If Company terminates Executive's employment for any of the reasons set forth in
this Section 4(b), Company shall have no further obligations hereunder from and
after the effective date of termination and shall have all other rights and
remedies available under this or any other agreement and at law or in equity.
If Executive's employment is terminated for Cause (as defined above) and
Executive does not consent to such termination, such termination shall not be
considered effective and Executive's rights under this Agreement during the Term
of Employment shall continue (including, without limitation, the provisions of
Sections 2 and 3 hereof) until the existence of such Cause has been determined
by an independent arbitrator appointed by the American Arbitration Association
and either party's rights to petition a court of law for a decision in the
matter have been exhausted. In connection with the appointment of an
arbitrator, both parties agree to submit the question to final and binding
arbitration by an appointee of the American Arbitration Association and to
cooperate with the arbitrator, with all costs of arbitration paid by the
Company. If the arbitrator determines that the Executive's termination was for
Cause, then the Executive shall repay to the Company all compensation received
pursuant to Section 2 during the period commencing upon the Executive's
termination and ending upon the arbitrator's final determination. The Executive
shall also repay to the Company all amounts that it paid or reimbursed the
Executive pursuant to Section 6.
(c) TERMINATION ON ACCOUNT OF DEATH. In the event of Executive's
death while in the employ of the Company, the Company shall pay to the
Executive's Designated Beneficiaries (as defined below) one hundred percent
(100%) of Executive's Base Salary as in effect immediately prior to Executive's
death, payable to Executive's Designated Beneficiary at the beginning of each
month for a period of twelve (12) months following Executive's death or until
the end of the Term of Employment, whichever is sooner. In addition,
Executive's surviving spouse, if any, shall continue to be covered by all
medical, health and accident insurance, and for the same coverage, maintained
for Executive's benefit immediately prior to the date of Executive's death, for
a period of twelve (12) months thereafter. In the event Executive's surviving
spouse is ineligible under the terms of such insurance to continue to be so
covered, the Company shall provide substantially equivalent coverage through
other sources or will provide the Executive's surviving spouse with a lump sum
payment equal to the agreed upon present value of the continuation of such
insurance coverages under this Section 4(c).
(d) VOLUNTARY TERMINATION BY EXECUTIVE. In the event that
Executive's employment with the Company is voluntarily terminated by Executive,
the Company shall have no further obligations hereunder from and after the
effective date of such termination and shall have all other rights and remedies
available under this or any other agreement and at law or in equity.
(e) FAILURE OF MERGER TO CLOSE. In the event that the Merger Date
fails to take place on or before January 31, 1997, Executive's Term of
Employment shall expire and the Company shall have no further obligations
hereunder except as follows:
(i) Executive will be "made whole" by the Company for losses (if
any) in purchasing a home in Portland, Oregon (including closing and loan
costs), provided Executive sells home and relocates to a new home outside of
Portland, Oregon, within one year after the date of such expiration; and
(ii) The Company will provide Executive with a severance benefit
equal to three hundred thousand dollars ($300,000) payable in twelve (12) equal
installments and provide Executive (or reimburse him for) health and disability
insurance coverage for twelve (12) months following such expiration.
5. CHANGE IN CONTROL. In the event of a Change in Control of the
Company, Executive shall be entitled to benefits provided under the Company's
Change in Control Plan and the agreement Employee has executed pursuant to that
plan.
6. EXPENSES. The Company will pay or reimburse the Executive for all
costs and expenses (including court costs and reasonable attorneys' fees)
incurred by the Executive as a result of any claim, action or proceeding arising
out of, or challenging the validity or enforceability of, this Agreement or any
provision hereof.
7. MITIGATION. In the event of a termination of Executive's employment
for any reason, Executive shall not be required to seek other employment; in
addition, no amount payable under Section 4 of this Agreement shall be reduced
by any compensation earned by Executive as a result of employment by another
employer after such termination of employment with the Company.
8. DESIGNATED BENEFICIARY. In the event of the death of Executive while
in the employ of the Company, or at any time thereafter during which amounts
remain payable to the Executive under Section 4(a) or (c) hereof, such payments
shall thereafter be made to such person or persons as the Executive may
specifically designate (successively or contingently) to receive payments under
this Agreement following the Executive's death by filing a written beneficiary
designation with the Company during the Executive's lifetime. Such beneficiary
designation shall be in such form as may be prescribed by the Company and may be
amended from time to time or may be revoked by the Executive pursuant to written
instruments filed with the Company during his lifetime. Beneficiaries
designated by Executive may be any natural or legal person or persons, including
a fiduciary, such as a trustee or a trust or the legal representative of an
estate. Unless otherwise provided by the beneficiary designation filed by
Executive, if all of the persons so designated die before Executive on the
occurrence of a contingency not contemplated in such beneficiary designation,
then the amount payable under this Agreement shall be paid to the Executive's
estate.
9. MISCELLANEOUS. This Agreement shall also be subject to the following
miscellaneous considerations:
(a) The Company represents and warrants to Executive that it has the
authorization, power and right to deliver, execute and fully perform its
obligations under this Agreement in accordance with its terms.
(b) Except as provided in Section 5, this Agreement contains a
complete statement of all the arrangements between the parties with respect to
Executive's employment by the Company, this Agreement supersedes all prior and
existing negotiations and agreements between them concerning the Executive's
employment, and this Agreement can only be changed or modified pursuant to a
written instrument executed by each of the parties hereto.
(c) If any provisions of this Agreement or any portion hereof is
declared invalid, illegal or incapable of being enforced by any court of
competent jurisdiction, the remainder of such provisions and all of the
remaining provisions of this Agreement shall continue in full force and effect.
(d) This Agreement shall be governed by and construed in accordance
with the laws of the State of Oregon, except to the extent governed by federal
law.
(e) All compensation payable hereunder shall be subject to such
withholding taxes as may be required by law.
(f) This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the Company. The Company will require any
successor, whether direct or indirect, by purchase, merger, consolidation or
otherwise, to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Except as expressly provided herein,
Executive may not sell, transfer, assign, or pledge any of his rights or
interests pursuant to this Agreement.
(g) Except as otherwise provided in Section 4(b) hereof, in the event
of any dispute between the Company and the Executive with respect to any of the
provisions of this Agreement, the Company and the Executive agree that either
party may request that the dispute be resolved by submitting the issue to
arbitration or such other form of alternative dispute resolution as the parties
may agree upon (collectively, "Alternative Dispute Resolution"). The parties
expressly agree and acknowledge, however that, except as otherwise provided in
Section 4(b) hereof, nothing in this Agreement (whether express or implied)
shall under any circumstances require either party to consent to Alternative
Dispute Resolution.
(h) Any rights of Executive hereunder shall be in addition to any
rights Executive may otherwise have under benefit plans or agreements of the
Company to which he is a party or in which he is a participant, including,
without limitation, any Company sponsored employee benefit plans. Provisions of
this Agreement shall not in any way abrogate Executive's rights under such other
plans and agreements.
(i) The Company shall, to the maximum extent permitted by law,
indemnify Executive against expenses (including, without limitation, reasonable
attorneys' fees), judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceedings arising by reason of the
fact that Executive is or was an employee, officer, or agent of the Company. The
Company shall advance to Executive expenses incurred in defending any such
proceedings to the maximum extent permitted by law. The Company's obligations
under this provision shall not cease upon termination of this Agreement.
(j) Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, or prevent that party thereafter from enforcing each
and every other provision of this Agreement.
10. GUARANTEE BY CLINICS. Each of The Corvallis Clinic, P.C., HealthFirst
Medical Group, P.C. and Medford Clinic, P.C., by signing this Agreement in the
space provided below, hereby agrees to guarantee in favor of the Executive its
pro rata share of the aggregate value of compensation and benefits provided to
the Executive under this Agreement, such pro rata shares of The Corvallis
Clinic, P.C., HealthFirst Medical Group, P.C. and Medford Clinic, P.C. being
33.8%, 42.6% and 23.6%, respectively.
IN WITNESS WHEREOF, the parties hereto have read, understood, and
voluntarily executed this Agreement as of the day and year first above written.
PHYSICIAN PARTNERS, INC.
/s/ David M. Goldberg By: /s/ Tim Dupell
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DAVID M. GOLDBERG Title:
AGREED AND ACKNOWLEDGED:
THE CORVALLIS CLINIC, P.C.
By: /s/ David H. Cutsforth, Jr., M.D.
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Title:
HEALTHFIRST MEDICAL GROUP, P.C.
By: /s/ Matthew M. Shelley
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Title: President
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MEDFORD CLINIC, P.C.
By: /s/ Bruce Van Zee, M.D.
---------------------------------
Title:
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EXECUTION COPY
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), is made
and entered into as of the 19th day of September, 1996, by and between Physician
Partners, Inc., a Delaware corporation (the "Company"), and Tim E. Dupell (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Executive and the Company have entered into the Employment
Agreement, dated as of July 29, 1996 (the "Old Employment Agreement"), providing
for the Company's employment of the Executive; and
WHEREAS, the Executive and the Company deem it to be in their respective
best interests to amend and restate the Old Employment Agreement upon the terms
and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and agreements contained herein, it is hereby agreed as follows:
1. DUTIES. The Company hereby agrees to employ Executive as its Senior
Vice President and Chief Financial Officer for the "Term of Employment" (as
herein defined). Executive in this capacity agrees to use his best efforts
during the Term of Employment to protect, encourage, and promote the interests
of the Company. During the Term of Employment, Executive shall also perform
such other duties consistent with the offices held by Executive as may be
reasonably assigned to him from time to time by the Chief Executive Officer of
the Company, and will devote substantial time and attention to such duties,
except while on sick leave, reasonable vacations, and excused leaves of absence.
During such period, Executive may also be required to perform services for one
or more affiliates of the Company.
2. COMPENSATION.
(a) BASE SALARY. From July 29, 1996 until the consummation of the
merger of the Company with the Corvallis Clinic, P.C., HealthFirst Medical
Group, P.C. and Medford Clinic, P.C. (the "Merger"), the Company agrees to pay
to Executive base salary at an annual rate of one hundred and fifty thousand
dollars ($150,000) payable in regular installments in accordance with the
Company's normal payroll procedures. Effective on the date the Merger is
consummated (the "Merger Date"), the Company agrees to
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pay to Executive a minimum base salary during the Term of Employment equal to
one hundred and fifty thousand dollars ($150,000) per year ("Base Salary"),
payable in regular installments in accordance with the Company's normal
payroll procedures. Executive's Base Salary shall be increased at the
discretion of the Compensation Committee of the Board of Directors of the
Company (the "Committee") to maintain or bring Executive to the 35th
percentile of peer companies selected by the Committee.
(b) ANNUAL INCENTIVE. Executive shall not be entitled to a bonus
award for any period prior to the Merger. However, effective on the Merger
Date, Executive will be eligible to participate in the Company's annual
management incentive plan (or such other incentive plan established in place of
the Company's annual management incentive plan) at a target bonus equal to such
percentage of Base Salary as determined each year by the Committee in its
discretion. The actual amount of the annual bonus award, if any, for a fiscal
year shall be dependent upon the achievement of certain financial standards of
performance for the operations of the Company, the achievement of certain non-
financial objectives mutually agreed upon by Executive and the Company at the
beginning of the fiscal year and a discretionary component for performance above
targets. For the 1997 fiscal year, the incentive standards and target goals for
Executive shall be mutually agreed upon by Executive and the Company within
sixty (60) days after the Merger Date and Executive shall be entitled to receive
a bonus award not less than ninety thousand dollars ($90,000) assuming
achievement of the financial standards of performance and 100% of the agreed
upon non-financial objectives. No bonus award for the 1997 fiscal year shall be
awarded if Executive fails to achieve at least 85% of the agreed upon non-
financial objectives. The Committee will review Executive's performance from
time to time and assuming satisfactory performance, additional bonus awards as
the Committee may determine in its sole discretion shall be made sufficient to
maintain Executive's short-term compensation package (i.e. Base Salary plus
annual bonus awards) at a level equal to the 60th percentile of peer companies
selected by the Committee.
(c) LONG-TERM INCENTIVES. As soon as practicable after the date
hereof, Executive shall receive a restricted stock award for 27,000 shares of
Class A Common Stock, par value $0.01 per share ("Class A Common Stock") of the
Company. One-third (1/3) of the restricted shares so awarded shall vest and the
risk of forfeiture on such shares shall lapse as of each of the first, second
and third anniversaries of the Merger Date, provided that Executive is still
employed on each such anniversary. In addition, effective on the Merger Date,
Executive shall be granted an option to purchase 35,000 shares of Class A Common
Stock of the Company at the fair market value of a share of the Class A Common
Stock of the Company as of the date such option is granted. The option shall
vest and become exercisable with respect to twenty percent (20%) of the shares
subject to the option on each anniversary of the date the option is granted.
The restricted stock award and the option grant specified above shall be subject
to such other terms and
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conditions as may be specified in a separate agreement providing for the
award or grant, as the case may be, and the terms and conditions relating to
such award or grant, including, without limitation, restriction on transfer
of shares, vesting requirements and forfeiture, and redemption of shares.
The Committee will review Executive's performance from time to time and
assuming satisfactory performance, additional awards of long term incentives
in such form and in such amounts as the Committee may determine in its sole
discretion, shall be made sufficient to maintain Executive's total
compensation (i.e Base Salary, annual bonus awards and long-term incentives)
at a level that is within the 60th to 70th percentile of compensation ranges
for peer companies selected by the Committee.
3. BENEFITS. During the Term of Employment:
(a) The Company shall furnish Executive with, and Executive shall be
allowed full use of, office facilities, automobiles, secretarial and clerical
assistance, and other Company property and services of a quality, nature and to
the extent made available to senior executive employees of the Company from time
to time;
(b) Executive shall be eligible to participate in life, health, long-
term disability insurance and severance programs, stock purchase programs, stock
option plans, qualified and non-qualified pension and retirement plans,
incentive compensation programs and other fringe benefit programs, if any,
available to other senior executive employees of the Company and physicians
employed by medical clinics that are party to a practice management agreement
with the Company or any Subsidiary thereof;
(c) Executive shall be allowed 4 weeks of vacation and paid leaves of
absence on the same basis as other senior executive employees of the Company;
(d) Company will reimburse Executive for reasonable business expenses
in performing Executive's duties and promoting the business of Company,
including, without limitation, reasonable entertaining expenses, automobile
expenses, and travel and lodging, when incurred. The cost of these items shall
be borne by the Company upon presentation of an itemized expense voucher;
(e) The Company shall provide the Executive with a car allowance of
$1,000 per month and customary support, such as a cellular phone and laptop
computer; and
(f) Company shall reimburse Executive for reasonable and documented
relocation expenses that would otherwise be deductible by Executive.
4. TERM OF EMPLOYMENT. As used herein, the phrase "Term of Employment"
shall mean the period commencing on July 29, 1996 and ending July 28, 1999. The
Company shall provide Executive with at
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least ninety (90) days notice of its intent not to renew this Agreement.
Notwithstanding the foregoing, the Term of Employment shall expire on the
first to occur of the following:
(a) TERMINATION WITHOUT CAUSE. Notwithstanding anything to the
contrary in this Agreement, whether express or implied, the Company may at any
time terminate Executive's employment with the Company by giving Executive at
least sixty (60) days prior written notice of the effective date of termination.
In the event of such termination, Executive shall be entitled to receive his
Base Salary (at the rate in effect immediately prior to such notice) during the
period commencing on the effective date of such termination and ending on the
first anniversary of such date (the "Severance Period") as though Executive's
employment had continued during the Severance Period. Executive shall also be
entitled to continue to be covered by all medical, health and accident and
disability insurance, at the same coverage level maintained for Executive's
benefit immediately prior to the date of Executive's termination, until the end
of the Severance Period. In the event Executive is ineligible under the terms
of such insurance to continue to be so covered, the Company shall provide
Executive with substantially equivalent coverage through other sources or will
provide the Executive with a lump sum payment equal to the agreed upon present
value of the continuation of such insurance coverages to which Executive is
entitled under this section 4(a).
(b) TERMINATION FOR CAUSE. The Company shall have the right to
terminate Executive's employment at any time for Cause by giving Executive
written notice of the effective date of termination (which effective date may,
except as otherwise provided below, be the date of such notice). For purposes
of this Agreement, Cause shall mean:
(i) fraud, misappropriation, embezzlement or other act of
material misconduct against the Company or any of its affiliates thereof or an
act contrary to their best interests;
(ii) substantial and willful failure to render services in
accordance with the terms of this Agreement, provided that (A) a demand for
performance of services had been delivered to the Executive by the Chief
Executive Officer of the Company at least thirty (30) days prior to termination
identifying the manner in which such Chief Executive Officer believes that the
Executive has failed to perform and (B) the Executive has thereafter failed to
remedy such failure to perform;
(iii) willful and knowing violation of any rules or regulations
of any governmental or regulatory body material to the business of the Company;
or
(iv) conviction of or plea of guilty or nolo contendere to a
felony.
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If Company terminates Executive's employment for any of the reasons set forth in
this Section 4(b), Company shall have no further obligations hereunder from and
after the effective date of termination and shall have all other rights and
remedies available under this or any other agreement and at law or in equity.
If Executive's employment is terminated for Cause (as defined above) and
Executive does not consent to such termination, such termination shall not be
considered effective and Executive's rights under this Agreement during the Term
of Employment shall continue (including, without limitation, the provisions of
Sections 2 and 3 hereof) until the existence of such Cause has been determined
by an independent arbitrator appointed by the American Arbitration Association
and either party's rights to petition a court of law for a decision in the
matter have been exhausted. In connection with the appointment of an
arbitrator, both parties agree to submit the question to final and binding
arbitration by an appointee of the American Arbitration Association and to
cooperate with the arbitrator, with all costs of arbitration paid by the
Company. If the arbitrator determines that the Executive's termination was for
Cause, then the Executive shall repay to the Company all compensation received
pursuant to Section 2 during the period commencing upon the Executive's
termination and ending upon the arbitrator's final determination. The Executive
shall also repay to the Company all amounts that it paid or reimbursed the
Executive pursuant to Section 6.
(c) TERMINATION ON ACCOUNT OF DEATH. In the event of Executive's
death while in the employ of the Company, the Company shall pay to the
Executive's Designated Beneficiaries (as defined below) one hundred percent
(100%) of Executive's Base Salary as in effect immediately prior to Executive's
death, payable to Executive's Designated Beneficiary at the beginning of each
month for a period of twelve (12) months following Executive's death or until
the end of the Term of Employment, whichever is sooner. In addition,
Executive's surviving spouse, if any, shall continue to be covered by all
medical, health and accident insurance, and for the same coverage, maintained
for Executive's benefit immediately prior to the date of Executive's death, for
a period of twelve (12) months thereafter. In the event Executive's surviving
spouse is ineligible under the terms of such insurance to continue to be so
covered, the Company shall provide substantially equivalent coverage through
other sources or will provide the Executive's surviving spouse with a lump sum
payment equal to the agreed upon present value of the continuation of such
insurance coverages under this Section 4(c).
(d) VOLUNTARY TERMINATION BY EXECUTIVE. In the event that
Executive's employment with the Company is voluntarily terminated by Executive,
the Company shall have no further obligations hereunder from and after the
effective date of such termination and shall have all other rights and remedies
available under this or any other agreement and at law or in equity.
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(e) FAILURE OF MERGER TO CLOSE. In the event that the Merger Date
fails to take place on or before January 31, 1997, Executive's Term of
Employment shall expire and the Company shall have no further obligations
hereunder except as follows:
(i) Executive will be 'made whole' by the Company for losses (if
any) in purchasing a home in Portland, Oregon (including closing and loan
costs), provided Executive sells his home and relocates to a new home
outside of Portland, Oregon, within one year after the date of such
expiration; and
(ii) The Company will provide Executive with a severance benefit
equal to one hundred and fifty thousand dollars ($150,000) payable in
twelve (12) equal installments and provide Executive (or reimburse him for)
health and disability insurance coverage for twelve (12) months following
such expiration.
5. CHANGE IN CONTROL. In the event of a Change in Control of the
Company, Executive shall be entitled to benefits provided under the Company's
Change in Control Plan and the agreement Employee has executed pursuant to that
plan.
6. EXPENSES. The Company will pay or reimburse the Executive for all
costs and expenses (including court costs and reasonable attorneys' fees)
incurred by the Executive as a result of any claim, action or proceeding arising
out of, or challenging the validity or enforceability of, this Agreement or any
provision hereof.
7. MITIGATION. In the event of a termination of Executive's employment
for any reason, Executive shall not be required to seek other employment; in
addition, no amount payable under Section 4 of this Agreement shall be reduced
by any compensation earned by Executive as a result of employment by another
employer after such termination of employment with the Company.
8. DESIGNATED BENEFICIARY. In the event of the death of Executive while
in the employ of the Company, or at any time thereafter during which amounts
remain payable to the Executive under Section 4(a) or (c) hereof, such payments
shall thereafter be made to such person or persons as the Executive may
specifically designate (successively or contingently) to receive payments under
this Agreement following the Executive's death by filing a written beneficiary
designation with the Company during the Executive's lifetime. Such beneficiary
designation shall be in such form as may be prescribed by the Company and may be
amended from time to time or may be revoked by the Executive pursuant to written
instruments filed with the Company during his lifetime. Beneficiaries
designated by Executive may be any natural or legal person or persons, including
a fiduciary, such as a trustee or a trust or the legal representative of an
estate. Unless otherwise provided by the beneficiary designation filed by
Executive, if all of the persons so designated die before Executive on the
occurrence
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of a contingency not contemplated in such beneficiary designation, then the
amount payable under this Agreement shall be paid to the Executive's estate.
9. MISCELLANEOUS. This Agreement shall also be subject to the following
miscellaneous considerations:
(a) The Company represents and warrants to Executive that it has the
authorization, power and right to deliver, execute and fully perform its
obligations under this Agreement in accordance with its terms.
(b) Except as provided in Section 5, this Agreement contains a
complete statement of all the arrangements between the parties with respect to
Executive's employment by the Company, this Agreement supersedes all prior and
existing negotiations and agreements between them concerning the Executive's
employment, and this Agreement can only be changed or modified pursuant to a
written instrument executed by each of the parties hereto.
(c) If any provisions of this Agreement or any portion hereof is
declared invalid, illegal or incapable of being enforced by any court of
competent jurisdiction, the remainder of such provisions and all of the
remaining provisions of this Agreement shall continue in full force and effect.
(d) This Agreement shall be governed by and construed in accordance
with the laws of the State of Oregon, except to the extent governed by federal
law.
(f) All compensation payable hereunder shall be subject to such
withholding taxes as may be required by law.
(g) This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the Company. The Company will require any
successor, whether direct or indirect, by purchase, merger, consolidation or
otherwise, to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Except as expressly provided herein,
Executive may not sell, transfer, assign, or pledge any of his rights or
interests pursuant to this Agreement.
(h) Except as otherwise provided in Section 4(b) hereof, in the event
of any dispute between the Company and the Executive with respect to any of the
provisions of this Agreement, the Company and the Executive agree that either
party may request that the dispute be resolved by submitting the issue to
arbitration or such other form of alternative dispute resolution as the parties
may agree upon (collectively, "Alternative Dispute Resolution"). The parties
expressly agree and acknowledge, however that, except as otherwise provided in
Section 4(b) hereof, nothing in this Agreement (whether express or implied)
shall under any
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circumstances require either party to consent to Alternative Dispute
Resolution.
(i) Any rights of Executive hereunder shall be in addition to any
rights Executive may otherwise have under benefit plans or agreements of the
Company to which he is a party or in which he is a participant, including,
without limitation, any Company sponsored employee benefit plans. Provisions of
this Agreement shall not in any way abrogate Executive's rights under such other
plans and agreements.
(j) The Company shall, to the maximum extent permitted by law,
indemnify Executive against expenses (including, without limitation, reasonable
attorneys' fees), judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceedings arising by reason of the
fact that Executive is or was an employee, officer, or agent of the Company.
The Company shall advance to Executive expenses incurred in defending any such
proceedings to the maximum extent permitted by law. The Company's obligations
under this provision shall not cease upon termination of this Agreement.
(k) Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, or prevent that party thereafter from enforcing each
and every other provision of this Agreement.
10. GUARANTEE BY CLINICS. Each of The Corvallis Clinic, P.C., HealthFirst
Medical Group, P.C. and Medford Clinic, P.C., by signing this Agreement in the
space provided below, hereby agrees to guarantee in favor of the Executive its
pro rata share of the aggregate value of compensation and benefits provided to
the Executive under this Agreement, such pro rata shares of The Corvallis
Clinic, P.C., HealthFirst Medical Group, P.C. and Medford Clinic, P.C. being
33.8%, 42.6% and 23.6%, respectively.
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IN WITNESS WHEREOF, the parties hereto have read, understood, and
voluntarily executed this Agreement as of the day and year first above written.
PHYSICIAN PARTNERS, INC.
/s/ Tim Dupell By: /s/ David M. Goldberg
- ------------------------------ --------------------------------
TIM E. DUPELL Title: President, Chief Executive
Officer and Director
AGREED & ACKNOWLEDGED:
THE CORVALLIS CLINIC, P.C.
By: /s/ David H. Cutsforth, Jr., M.D.
------------------------------------
Title: President
HEALTHFIRST MEDICAL GROUP, P.C.
By: /s/ Matthew M. Shelley
-------------------------
Title: President
MEDFORD CLINIC, P.C.
By: /s/ Bruce Van Zee
-----------------------
Title: President
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EXECUTION COPY
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT ("Agreement"), is made and entered into as of the 19th day
of September, 1996, by and between Physician Partners, Inc., a Delaware
corporation (the "Company"), and Michael F. Bonazzola, M.D. (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive and the Company deem it to be in their respective
best interests to enter into an agreement providing for the Company's employment
of the Executive pursuant to the terms herein stated.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and agreements contained herein, it is hereby agreed as follows:
1. DUTIES. The Company hereby agrees to employ Executive as its Senior
Vice President and Chief Medical Officer for the "Term of Employment" (as herein
defined). Executive in this capacity agrees to use his best efforts during the
Term of Employment to protect, encourage, and promote the interests of the
Company. During the Term of Employment, Executive shall also perform such other
duties consistent with the offices held by Executive as may be reasonably
assigned to him from time to time by the Chief Executive Officer of the Company,
and will devote substantial time and attention to such duties, except while on
sick leave, reasonable vacations, and excused leaves of absence. During such
period, Executive may also be required to perform services for one or more
affiliates of the Company.
2. COMPENSATION.
(a) BASE SALARY. No base salary shall be paid from the date of this
Agreement until the consummation of the merger of the Company with the Corvallis
Clinic, P.C., HealthFirst Medical Group, P.C. and Medford Clinic, P.C. (the
"Merger"). Effective on the date the Merger is consummated (the "Merger Date"),
the Company agrees to pay to Executive a minimum base salary during the Term of
Employment equal to one hundred ninety thousand dollars ($190,000) per year
("Base Salary"), payable in regular installments in accordance with the
Company's normal payroll procedures. Executive's Base Salary shall be increased
at the discretion of the Compensation Committee of the Board of Directors of the
Company (the "Committee") to maintain or bring Executive to the 35th percentile
of peer companies selected by the Committee.
<PAGE>
(b) ANNUAL INCENTIVE. Executive shall be entitled to a bonus award
of $25,000 as of the Merger Date provided the Merger is consummated. In
addition, effective on the Merger Date Executive will be eligible to participate
in the Company's annual management incentive plan (or such other incentive plan
established in place of the Company's annual management incentive plan) at a
target bonus equal to such percentage of Base Salary as determined each year by
the Committee in its discretion. The actual amount of the annual bonus award,
if any, for a fiscal year shall be dependent upon the achievement of certain
financial standards of performance for the operations of the Company, the
achievement of certain non-financial objectives mutually agreed upon by
Executive and the Company at the beginning of the fiscal year and a
discretionary component for performance above targets. For the 1997 fiscal
year, the incentive standards and target goals for Executive shall be mutually
agreed upon by Executive and the Company within sixty (60) days after the Merger
Date and Executive shall be entitled to receive a bonus award not less than
seventy thousand dollars ($70,000) assuming achievement of the financial
standards of performance and 100% of the agreed upon non-financial objectives.
No bonus award for the 1997 fiscal year shall be awarded if Executive fails to
achieve at least 85% of the agreed upon non-financial objectives. The Committee
will review Executive's performance from time to time and assuming satisfactory
performance, additional bonus awards as the Committee may determine in its sole
discretion shall be made sufficient to maintain Executive's short-term
compensation package (i.e, Base Salary plus annual bonus awards) at a level
equal to the 60th percentile of peer companies selected by the Committee.
(c) LONG-TERM INCENTIVES. Executive shall not be entitled to any
long-term incentive for any period prior to the Merger. However, effective on
the Merger Date, Executive shall be granted an option to purchase 35,000 shares
of common stock, par value $0.01 per share (the "Common Stock"), of the Company
at the fair market value of a share of the Common Stock of the Company as of the
date such option is granted. The option shall vest and become exercisable with
respect to twenty percent (20%) of the shares subject to the option on each
anniversary of the date the option is granted. The option grant specified above
shall be subject to such other terms and conditions as may be specified in a
separate agreement providing for the award or grant as the case may be. The
Committee will review Executive's performance from time to time and assuming
satisfactory performance, additional awards of long term incentives in such form
and in such amounts as the Committee may determine in its sole discretion, shall
be made sufficient to maintain Executive's total compensation (i.e, Base Salary,
annual bonus awards and long-term incentives) at a level that is within the 60th
to 70th percentile of compensation ranges for peer companies selected by the
Committee.
3. BENEFITS. Beginning on the Merger Date:
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(a) The Company shall furnish Executive with, and Executive shall be
allowed full use of, office facilities, automobiles, secretarial and clerical
assistance, and other Company property and services of a quality, nature and to
the extent made available to senior executive employees of the Company from time
to time;
(b) Executive shall be eligible to participate in life, health,
long-term disability insurance and severance programs, stock purchase programs,
stock option plans, qualified and non-qualified pension and retirement plans,
incentive compensation programs and other fringe benefit programs, if any,
available to other senior executive employees of the Company and physicians
employed by medical clinics that are party to a practice management agreement
with the Company or any subsidiary thereof;
(c) Executive shall be allowed 4 weeks of vacation and paid leaves of
absence on the same basis as other senior executive employees of the Company;
(d) Company will reimburse Executive for reasonable business expenses
in performing Executive's duties and promoting the business of Company,
including, without limitation, reasonable entertaining expenses, automobile
expenses, and travel and lodging, when incurred. The cost of these items shall
be borne by the Company upon presentation of an itemized expense voucher;
(e) The Company shall provide the Executive with a car allowance of
$1,000 per month and customary support, such as a cellular phone and laptop
computer; and
(f) Company shall reimburse Executive for reasonable and documented
relocation expenses for a move from Medford, Oregon to Portland, Oregon that
would otherwise be deductible by Executive provided the relocation occurs on or
before July 1, 1997.
4. TERM OF EMPLOYMENT. As used herein, the phrase "Term of Employment"
shall mean the period commencing on the Merger Date and ending three (3) years
from the Merger Date. Company shall provide Executive with at least ninety (90)
days notice of its intent not to renew this Agreement. Notwithstanding the
foregoing, the Term of Employment shall expire on the first to occur of the
following:
(a) TERMINATION WITHOUT CAUSE. Notwithstanding anything to the
contrary in this Agreement, whether express or implied, the Company may at any
time terminate Executive's employment with the Company by giving Executive at
least sixty (60) days prior written notice of the effective date of termination.
In the event of such termination, Executive shall be entitled to receive his
Base Salary (at the rate in effect immediately prior to such notice) during the
period commencing on the effective date of such termination and ending on the
first anniversary of such date (the "Severance
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Period") as though Executive's employment had continued during the Severance
Period. Executive shall also be entitled to continue to be covered by all
medical, health and accident and disability insurance, at the same coverage
level maintained for Executive's benefit immediately prior to the date of
Executive's termination, until the end of the Severance Period. In the event
Executive is ineligible under the terms of such insurance to continue to be so
covered, the Company shall provide Executive with substantially equivalent
coverage through other sources or will provide the Executive with a lump sum
payment equal to the agreed upon present value of the continuation of such
insurance coverages to which Executive is entitled under this section 4(a).
(b) TERMINATION FOR CAUSE. Company shall have the right to terminate
Executive's employment at any time for Cause by giving Executive written notice
of the effective date of termination (which effective date may, except as
otherwise provided below, be the date of such notice). For purposes of this
Agreement, Cause shall mean:
(i) fraud, misappropriation, embezzlement or other act of
material misconduct against the Company or any of its affiliates thereof or an
act contrary to their best interests;
(ii) substantial and willful failure to render services in
accordance with the terms of this Agreement, provided that (A) a demand for
performance of services had been delivered to the Executive by the Chief
Executive Officer of the Company at least thirty (30) days prior to termination
identifying the manner in which such Chief Executive Officer believes that the
Executive has failed to perform and (B) the Executive has thereafter failed to
remedy such failure to perform;
(iii) willful and knowing violation of any rules or regulations
of any governmental or regulatory body material to the business of the Company;
or
(iv) conviction of or plea of guilty or nolo contendere to a
felony.
If Company terminates Executive's employment for any of the reasons set forth in
this Section 4(b), Company shall have no further obligations hereunder from and
after the effective date of termination and shall have all other rights and
remedies available under this or any other agreement and at law or in equity.
If Executive's employment is terminated for Cause (as defined above) and
Executive does not consent to such termination, such termination shall not be
considered effective and Executive's rights under this Agreement during the Term
of Employment (including, without limitation, the provisions of Sections 2 and 3
hereof) until the existence of such Cause has been determined by an independent
arbitrator appointed by the American Arbitration
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Association and either party's rights to petition a court of law for a decision
in the matter have been exhausted. In connection with the appointment of an
arbitrator, both parties agree to submit the question to final and binding
arbitration by an appointee of the American Arbitration Association and to
cooperate with the arbitrator, with all costs of arbitration paid by the
Company. If the arbitrator determines that the Executive's termination was for
Cause, then the Executive shall repay to the Company all compensation received
pursuant to Section 2 during the period commencing upon the Executive's
termination and ending upon the arbitrator's final determination. The Executive
shall also repay to the Company all amounts that it paid or reimbursed the
Executive pursuant to Section 6.
(c) TERMINATION ON ACCOUNT OF DEATH. In the event of Executive's
death while in the employ of the Company, the Company shall pay to the
Executive's Designated Beneficiaries (as defined below) one hundred percent
(100%) of Executive's Base Salary as in effect immediately prior to Executive's
death, payable to Executive's Designated Beneficiary at the beginning of each
month for a period of twelve (12) months following Executive's death or until
the end of the Term of Employment, whichever is sooner. In addition,
Executive's surviving spouse, if any, shall continue to be covered by all
medical, health and accident insurance, and for the same coverage, maintained
for Executive's benefit immediately prior to the date of Executive's death, for
a period of twelve (12) months thereafter. In the event Executive's surviving
spouse is ineligible under the terms of such insurance to continue to be so
covered, the Company shall provide substantially equivalent coverage through
other sources or will provide the Executive's surviving spouse with a lump sum
payment equal to the agreed upon present value of the continuation of such
insurance coverages under this Section 4(c).
(d) VOLUNTARY TERMINATION BY EXECUTIVE. In the event that
Executive's employment with the Company is voluntarily terminated by Executive,
the Company shall have no further obligations hereunder from and after the
effective date of such termination and shall have all other rights and remedies
available under this or any other agreement and at law or in equity.
(e) FAILURE OF MERGER TO CLOSE. In the event that the Merger fails
to take place on or before January 31, 1997, Executive's Term of Employment
shall expire and the Company shall have no further obligations hereunder except
as follows:
(i) The Executive will be "made whole" by the Company for losses
(if any) in purchasing a home in Portland, Oregon (including closing and loan
costs), provided Executive sells his home and relocates to a new home outside of
Portland, Oregon, within one year after the date of such expiration; and
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(ii) The Company will provide Executive with a severance benefit
equal to one hundred ninety thousand dollars ($190,000) payable in twelve (12)
equal installments and provide Executive (or reimburse him for) health and
disability insurance coverage for twelve (12) months following such expiration.
5. CHANGE IN CONTROL. In the event of a Change in Control of the
Company, Executive shall be entitled to benefits provided under the Company's
Change in Control Plan and the agreement Employee has executed pursuant to that
plan.
6. EXPENSES. Company will pay or reimburse the Executive for all costs
and expenses (including court costs and reasonable attorneys' fees) incurred by
the Executive as a result of any claim, action or proceeding arising out of, or
challenging the validity or enforceability of, this Agreement or any provision
hereof.
7. MITIGATION. In the event of a termination of Executive's employment
for any reason, Executive shall not be required to seek other employment; in
addition, no amount payable under Section 4 of this Agreement shall be reduced
by any compensation earned by Executive as a result of employment by another
employer after such termination of employment with the Company.
8. DESIGNATED BENEFICIARY. In the event of the death of Executive while
in the employ of the Company, or at any time thereafter during which amounts
remain payable to the Executive under Section 4(a) or (c) hereof, such payments
shall thereafter be made to such person or persons as the Executive may
specifically designate (successively or contingently) to receive payments under
this Agreement following the Executive's death by filing a written beneficiary
designation with the Company during the Executive's lifetime. Such beneficiary
designation shall be in such form as may be prescribed by the Company and may be
amended from time to time or may be revoked by the Executive pursuant to written
instruments filed with the Company during his lifetime. Beneficiaries
designated by Executive may be any natural or legal person or persons, including
a fiduciary, such as a trustee or a trust or the legal representative of an
estate. Unless otherwise provided by the beneficiary designation filed by
Executive, if all of the persons so designated die before Executive on the
occurrence of a contingency not contemplated in such beneficiary designation,
then the amount payable under this Agreement shall be paid to the Executive's
estate.
9. MISCELLANEOUS. This Agreement shall also be subject to the following
miscellaneous considerations:
(a) The Company represents and warrants to Executive that it has the
authorization, power and right to deliver, execute
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and fully perform its obligations under this Agreement in accordance with its
terms.
(b) Except as provided in Section 5, this Agreement contains a
complete statement of all the arrangements between the parties with respect to
Executive's employment by the Company, this Agreement supersedes all prior and
existing negotiations and agreements between them concerning the Executive's
employment, and this Agreement can only be changed or modified pursuant to a
written instrument executed by each of the parties hereto.
(c) If any provisions of this Agreement or any portion hereof is
declared invalid, illegal or incapable of being enforced by any court of
competent jurisdiction, the remainder of such provisions and all of the
remaining provisions of this Agreement shall continue in full force and effect.
(d) This Agreement shall be governed by and construed in accordance
with the laws of the State of Oregon, except to the extent governed by federal
law.
(e) All compensation payable hereunder shall be subject to such
withholding taxes as may be required by law.
(f) This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the Company. Company will require any successor,
whether direct or indirect, by purchase, merger, consolidation or otherwise, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Except as expressly provided herein, Executive may
not sell, transfer, assign, or pledge any of his rights or interests pursuant to
this Agreement.
(g) Except as otherwise provided in Section 4(b) hereof, in the event
of any dispute between the Company and the Executive with respect to any of the
provisions of this Agreement, the Company and the Executive agree that either
party may request that the dispute be resolved by submitting the issue to
arbitration or such other form of alternative dispute resolution as the parties
may agree upon (collectively, "Alternative Dispute Resolution"). The parties
expressly agree and acknowledge, however that, except as otherwise provided in
Section 4(b) hereof, nothing in this Agreement (whether express or implied)
shall under any circumstances require either party to consent to Alternative
Dispute Resolution.
(h) Any rights of Executive hereunder shall be in addition to any
rights Executive may otherwise have under benefit plans or agreements of the
Company to which he is a party or in which he is a participant, including,
without limitation, any Company sponsored employee benefit plans. Provisions of
this
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Agreement shall not in any way abrogate Executive's rights under such other
plans and agreements.
(i) The Company shall, to the maximum extent permitted by law,
indemnify Executive against expenses (including, without limitation, reasonable
attorneys' fees), judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceedings arising by reason of the
fact that Executive is or was an employee, officer, or agent of the Company.
Company shall advance to Executive expenses incurred in defending any such
proceedings to the maximum extent permitted by law. Company's obligations under
this provision shall not cease upon termination of this Agreement.
(j) Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, or prevent that party thereafter from enforcing each
and every other provision of this Agreement.
10. GUARANTEE BY CLINICS. Each of The Corvallis Clinic, P.C., HealthFirst
Medical Group, P.C. and Medford Clinic, P.C., by signing this Agreement in the
space provided below, hereby agrees to guarantee in favor of the Executive its
pro rata share of the aggregate value of compensation and benefits provided to
the Executive under this Agreement, such pro rata shares of The Corvallis
Clinic, P.C., HealthFirst Medical Group, P.C. and Medford Clinic, P.C. being
33.8%, 42.6% and 23.6%, respectively.
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IN WITNESS WHEREOF, the parties hereto have read, understood, and
voluntarily executed this Agreement as of the day and year first above written.
PHYSICIAN PARTNERS, INC.
/s/ Michael F. Bonazzola By: David M. Goldberg
- ------------------------- ---------------------
MICHAEL F. BONAZZOLA, M.D. Title: President, Chief Executive
Officer and Director
AGREED AND ACKNOWLEDGED:
THE CORVALLIS CLINIC, P.C.
By: David H. Cutsforth, Jr.
----------------------------
Title: President
HEALTHFIRST MEDICAL GROUP, P.C.
By: Matthew Shelley
----------------------------
Title: President
MEDFORD CLINIC, P.C.
By: /s/ Bruce E. Van Zee
---------------------------
Title: President
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<PAGE>
EXECUTION COPY
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), is made and entered into as of the 19th day
of September, 1996, by and between Physician Partners, Inc., a Delaware
corporation (the "Company"), and Jerry Erstgaard (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive and the Company deem it to be in their respective
best interests to enter into an agreement providing for the Company's employment
of Executive pursuant to the terms herein stated.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and agreements contained herein, it is hereby agreed as follows:
1. DUTIES. The Company hereby agrees to employ Executive as its Senior
Vice President for the "Term of Employment" (as herein defined). Executive in
this capacity agrees to use his best efforts during the Term of Employment to
protect, encourage, and promote the interests of the Company. During the Term
of Employment, Executive shall also perform such other duties consistent with
the office held by Executive as may be reasonably assigned to him from time to
time by the Chief Executive Officer of the Company, and will devote substantial
time and attention to such duties, except while on sick leave, reasonable
vacations, and excused leaves of absence. During such period, Executive may
also be required to perform services for one or more affiliates of the Company.
2. COMPENSATION.
(a) BASE SALARY. Effective on the date (the "Merger Date") of the
merger of the Company with the Corvallis Clinic, P.C., HealthFirst Medical
Group, P.C. and Medford Clinic, P.C. (the "Merger"), the Company agrees to pay
to Executive a minimum base salary during the Term of Employment equal to one
hundred seventy five thousand dollars ($175,000) per year ("Base Salary"),
payable in regular installments in accordance with the Company's normal payroll
procedures. Executive's Base Salary shall be increased at the discretion of the
Compensation Committee of the Board of Directors of the Company (the
"Committee") to maintain or bring Executive to the 35th percentile of peer
companies selected by the Committee.
(b) ANNUAL INCENTIVE. Effective on the Merger Date, Executive will
be eligible to participate in the Company's annual management incentive plan (or
such other incentive plan established in place of the Company's annual
management incentive plan) at a
<PAGE>
target bonus equal to such percentage of Base Salary as determined each year by
the Committee in its discretion. The actual amount of the annual bonus award,
if any, for a fiscal year shall be dependent upon the achievement of certain
financial standards of performance for the operations of the Company, the
achievement of certain non-financial objectives mutually agreed upon by
Executive and the Company at the beginning of the fiscal year and a
discretionary component for performance above targets. For the 1997 fiscal
year, the incentive standards and target goals for Executive shall be mutually
agreed upon by Executive and the Company within sixty (60) days after the Merger
Date and Executive shall be entitled to receive a bonus award not less than
fifty thousand dollars ($50,000) assuming achievement of the financial standards
of performance and 100% of the agreed upon non-financial objectives. No bonus
award for the 1997 fiscal year shall be awarded if Executive fails to achieve at
least 85% of the agreed upon non-financial objectives. The Committee will
review Executive's performance from time to time and assuming satisfactory
performance, additional bonus awards as the Committee may determine in its sole
discretion shall be made sufficient to maintain Executive's short-term
compensation package (i.e, Base Salary plus annual bonus awards) at a level
equal to the 60th percentile of peer companies selected by the Committee.
(c) LONG-TERM INCENTIVES. Executive shall not be entitled to any
long-term incentive for any period prior to the Merger. However, effective on
the Merger Date, Executive shall be granted an option to purchase 35,000 shares
of the Common Stock of the Company at the fair market value of a share of the
common stock, par value $0.01 per share (the "Common Stock"), of the Company as
of the date such option is granted. The option shall vest and become
exercisable with respect to twenty percent (20%) of the shares subject to the
option on each anniversary of the date the option is granted. The option grant
specified above shall be subject to such other terms and conditions as may be
specified in a separate agreement providing for the award or grant as the case
may be. The Committee will review Executive's performance from time to time and
assuming satisfactory performance, additional awards of long term incentives in
such form and in such amounts as the Committee may determine in its sole
discretion, shall be made sufficient to maintain Executive's total compensation
(i.e., Base Salary, annual bonus awards and long-term incentives) at a level
that is within the 60th to 70th percentile of compensation ranges for peer
companies selected by the Committee.
3. BENEFITS. During the Term of Employment:
(a) The Company shall furnish Executive with, and Executive shall be
allowed full use of, office facilities, automobiles, secretarial and clerical
assistance, and other Company property and services of a quality, nature and to
the extent made
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available to senior executive employees of the Company from time to time;
(b) Executive shall be eligible to participate in life, health, long-
term disability insurance and severance programs, stock purchase programs, stock
option plans, qualified and non-qualified pension and retirement plans,
incentive compensation programs and other fringe benefit programs, if any,
available to other senior executive employees of the Company and physicians
employed by medical clinics that are party to a practice management
agreement with the Company or any Subsidiary thereof;
(c) Executive shall be allowed 4 weeks of vacation and paid leaves of
absence on the same basis as other senior executive employees of the Company;
and
(d) Company will reimburse Executive for reasonable business expenses
in performing Executive's duties and promoting the business of Company,
including, without limitation, reasonable entertaining expenses, automobile
expenses, and travel and lodging, when incurred. The cost of these items shall
be borne by the Company upon presentation of an itemized expense voucher.
4. TERM OF EMPLOYMENT. As used herein, the phrase "Term of Employment"
shall mean the period commencing on the Merger Date and ending three (3) years
from the Merger Date. Company shall provide Executive with at least ninety (90)
days notice of its intent not to renew this Agreement. Notwithstanding the
foregoing, the Term of Employment shall expire on the first to occur of the
following:
(a) TERMINATION WITHOUT CAUSE. Notwithstanding anything to the
contrary in this Agreement, whether express or implied, the Company may at any
time terminate Executive's employment with the Company by giving Executive at
least sixty (60) days prior written notice of the effective date of termination.
In the event of such termination, Executive shall be entitled to receive his
Base Salary (at the rate in effect immediately prior to such notice) during the
period commencing on the effective date of such termination and ending on the
first anniversary of such date (the "Severance Period") as though Executive's
employment had continued. Executive shall also be entitled to continue to be
covered by all medical, health and accident and disability insurance, at the
same coverage level maintained for Executive's benefit immediately prior to the
date of Executive's termination, until the end of the Severance Period. In the
event Executive is ineligible under the terms of such insurance to continue to
be so covered, the Company shall provide Executive with substantially equivalent
coverage through other sources or will provide the Executive with a lump sum
payment equal to the agreed upon present value of the continuation of such
insurance coverages to which Executive is entitled under this Section 4(a).
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<PAGE>
(b) TERMINATION FOR CAUSE. Company shall have the right to terminate
Executive's employment at any time for Cause by giving Executive written notice
of the effective date of termination (which effective date may, except as
otherwise provided below, be the date of such notice). For purposes of this
Agreement, Cause shall mean:
(i) fraud, misappropriation, embezzlement or other act of
material misconduct against the Company or any of its affiliates thereof or an
act contrary to their best interests;
(ii) substantial and willful failure to render services in
accordance with the terms of this Agreement, provided that (A) a demand for
performance of services had been delivered to the Executive by the Chief
Executive Officer of the Company at least thirty (30) days prior to termination
identifying the manner in which such Chief Executive Officer believes that the
Executive has failed to perform and (B) the Executive has thereafter failed to
remedy such failure to perform;
(iii) willful and knowing violation of any rules or regulations
of any governmental or regulatory body material to the business of the Company;
or
(iv) conviction of or plea of guilty or nolo contendere to a
felony.
If Company terminates Executive's employment for any of the reasons set forth in
this Section 4(b), Company shall have no further obligations hereunder from and
after the effective date of termination and shall have all other rights and
remedies available under this or any other agreement and at law or in equity.
If Executive's employment is terminated for Cause (as defined above) and
Executive does not consent to such termination, such termination shall not be
considered effective and Executive's rights under this Agreement during the Term
of Employment (including, without limitation, the provisions of Sections 2 and 3
hereof) shall continue until the existence of such Cause has been determined by
an independent arbitrator appointed by the American Arbitration Association and
either party's rights to petition a court of law for a decision in the matter
have been exhausted. In connection with the appointment of an arbitrator, both
parties agree to submit the question to final and binding arbitration by an
appointee of the American Arbitration Association and to cooperate with the
arbitrator, with all costs of arbitration paid by the Company. If the
arbitrator determines that the Executive's termination was for Cause, then the
Executive shall repay to the Company all compensation received pursuant to
Section 2 during the period commencing upon the Executive's termination and
ending upon the arbitrator's final determination. The Executive shall also
repay to the Company all amounts that it paid or reimbursed the Executive
pursuant to Section 6.
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(c) TERMINATION ON ACCOUNT OF DEATH. In the event of Executive's
death while in the employ of the Company, the Company shall pay to the
Executive's Designated Beneficiaries (as defined below) one hundred percent
(100%) of Executive's Base Salary as in effect immediately prior to Executive's
death, payable to Executive's Designated Beneficiary at the beginning of each
month for a period of twelve (12) months following Executive's death or until
the end of the Term of Employment, whichever is sooner. In addition,
Executive's surviving spouse, if any, shall continue to be covered by all
medical, health and accident insurance, and for the same coverage, maintained
for Executive's benefit immediately prior to the date of Executive's death, for
a period of twelve (12) months thereafter. In the event Executive's surviving
spouse is ineligible under the terms of such insurance to continue to be so
covered, the Company shall provide substantially equivalent coverage through
other sources or will provide the Executive's surviving spouse with a lump sum
payment equal to the agreed upon present value of the continuation of such
insurance coverages under this Section 4(c).
(d) VOLUNTARY TERMINATION BY EXECUTIVE. In the event that
Executive's employment with the Company is voluntarily terminated by Executive,
the Company shall have no further obligations hereunder from and after the
effective date of such termination and shall have all other rights and remedies
available under this or any other agreement and at law or in equity.
5. CHANGE IN CONTROL. In the event of a Change in Control of the
Company, Executive shall be entitled to benefits provided under the Company's
Change in Control Plan and the agreement Employee has executed pursuant to that
plan.
6. EXPENSES. Company will pay or reimburse the Executive for all costs
and expenses (including court costs and reasonable attorneys' fees) incurred by
the Executive as a result of any claim, action or proceeding arising out of, or
challenging the validity or enforceability of, this Agreement or any provision
hereof.
7. MITIGATION. In the event of a termination of Executive's employment
for any reason, Executive shall not be required to seek other employment; in
addition, no amount payable under Section 4 of this Agreement shall be reduced
by any compensation earned by Executive as a result of employment by another
employer after such termination of employment with the Company.
8. DESIGNATED BENEFICIARY. In the event of the death of Executive while
in the employ of the Company, or at any time thereafter during which amounts
remain payable to the Executive under Section 4(a) or (c) hereof, such payments
shall thereafter be made to such person or persons as the Executive may
specifically designate (successively or contingently) to receive payments under
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this Agreement following the Executive's death by filing a written beneficiary
designation with the Company during the Executive's lifetime. Such beneficiary
designation shall be in such form as may be prescribed by the Company and may be
amended from time to time or may be revoked by the Executive pursuant to written
instruments filed with the Company during his lifetime. Beneficiaries
designated by Executive may be any natural or legal person or persons, including
a fiduciary, such as a trustee or a trust or the legal representative of an
estate. Unless otherwise provided by the beneficiary designation filed by
Executive, if all of the persons so designated die before Executive on the
occurrence of a contingency not contemplated in such beneficiary designation,
then the amount payable under this Agreement shall be paid to the Executive's
estate.
9. MISCELLANEOUS. This Agreement shall also be subject to the following
miscellaneous considerations:
(a) The Company represents and warrants to Executive that it has the
authorization, power and right to deliver, execute and fully perform its
obligations under this Agreement in accordance with its terms.
(b) Except as provided in Section 5, this Agreement contains a
complete statement of all the arrangements between the parties with respect to
Executive's employment by the Company, this Agreement supersedes all prior and
existing negotiations and agreements between them concerning the Executive's
employment, and this Agreement can only be changed or modified pursuant to a
written instrument executed by each of the parties hereto.
(c) If any provisions of this Agreement or any portion hereof is
declared invalid, illegal or incapable of being enforced by any court of
competent jurisdiction, the remainder of such provisions and all of the
remaining provisions of this Agreement shall continue in full force and effect.
(d) This Agreement shall be governed by and construed in accordance
with the laws of the State of Oregon, except to the extent governed by federal
law.
(e) All compensation payable hereunder shall be subject to such
withholding taxes as may be required by law.
(f) This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the Company. Company will require any successor,
whether direct or indirect, by purchase, merger, consolidation or otherwise, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Except as expressly provided
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herein, Executive may not sell, transfer, assign, or pledge any of his rights or
interests pursuant to this Agreement.
(g) Except as otherwise provided in Section 4(b) hereof, in the event
of any dispute between the Company and the Executive with respect to any of the
provisions of this Agreement, the Company and the Executive agree that either
party may request that the dispute be resolved by submitting the issue to
arbitration or such other form of alternative dispute resolution as the parties
may agree upon (collectively, "Alternative Dispute Resolution"). The parties
expressly agree and acknowledge, however, that except as otherwise provided in
Section 4(b) hereof, nothing in this Agreement (whether express or implied)
shall under any circumstances require either party to consent to Alternative
Dispute Resolution.
(h) Any rights of Executive hereunder shall be in addition to any
rights Executive may otherwise have under benefit plans or agreements of the
Company to which he is a party or in which he is a participant, including,
without limitation, any Company sponsored employee benefit plans. Provisions of
this Agreement shall not in any way abrogate Executive's rights under such other
plans and agreements.
(i) The Company shall, to the maximum extent permitted by law,
indemnify Executive against expenses (including, without limitation, reasonable
attorneys' fees), judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceedings arising by reason of the
fact that Executive is or was an employee, officer, or agent of the Company.
Company shall advance to Executive expenses incurred in defending any such
proceedings to the maximum extent permitted by law. Company's obligations under
this provision shall not cease upon termination of this Agreement.
(j) Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, or prevent that party thereafter from enforcing each
and every other provision of this Agreement.
10. GUARANTEE BY CLINICS. Each of The Corvallis Clinic, P.C., HealthFirst
Medical Group, P.C. and Medford Clinic, P.C., by signing this Agreement in the
space provided below, hereby agrees to guarantee in favor of the Executive its
pro rata share of the aggregate value of compensation and benefits provided to
the Executive under this Agreement, such pro rata shares of The Corvallis
Clinic, P.C., HealthFirst Medical Group, P.C. and Medford Clinic, P.C. being
33.8%, 42.6% and 23.6%, respectively.
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IN WITNESS WHEREOF, the parties hereto have read, understood, and
voluntarily executed this Agreement as of the day and year first above written.
PHYSICIAN PARTNERS, INC.
/s/ Jerry Erstgaard By: /s/ David M. Goldberg
- ----------------------------------- --------------------------------
JERRY ERSTGAARD Title: President, Chief
Executive Officer and
Director
AGREED AND ACKNOWLEDGED:
THE CORVALLIS CLINIC, P.C.
By: /s/ David H. Cutsforth, Jr.
----------------------------
Title: President
HEALTHFIRST MEDICAL GROUP, P.C.
By: /s/ Matthew Shelley
----------------------------
Title: President
MEDFORD CLINIC, P.C.
By: /s/ Bruce E. Van Zee
---------------------------
Title: President
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<PAGE>
EXECUTION COPY
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), is made
and entered into as of the 19th day of September, 1996, by and between Physician
Partners, Inc., a Delaware corporation (the "Company"), and David Kobriger (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Executive and the Company have entered into the Employment
Agreement, dated as of July 29, 1996 (the "Old Employment Agreement"), providing
for the Company's employment of the Executive; and
WHEREAS, the Executive and the Company deem it to be in their respective
best interests to amend and restate the Old Employment Agreement upon the terms
and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and agreements contained herein, it is hereby agreed as follows:
I. DUTIES. The Company hereby agrees to employ Executive as its
Senior Vice President for the "Term of Employment" (as herein defined).
Executive in this capacity agrees to use his best efforts during the Term of
Employment to protect, encourage, and promote the interests of the Company.
During the Term of Employment, Executive shall also perform such other duties
consistent with the office held by Executive as may be reasonably assigned to
him from time to time by the Chief Executive Officer of the Company, and will
devote substantial time and attention to such duties, except while on sick
leave, reasonable vacations, and excused leaves of absence. During such
period, Executive may also be required to perform services for one or more
affiliates of the Company.
1. COMPENSATION.
(a) BASE SALARY. Effective on the date (the "Merger Date") of the
merger of the Company with the Corvallis Clinic, P.C., HealthFirst Medical
Group, P.C. and Medford Clinic, P.C. (the "Merger"), the Company agrees to pay
to Executive a minimum base salary during the Term of Employment equal to one
hundred seventy five thousand dollars ($175,000) per year ("Base Salary"),
payable in regular installments in accordance with the Company's normal payroll
procedures. Executive's Base Salary shall be increased at the discretion of the
Compensation Committee of the Board of Directors of the Company (the
"Committee") to maintain or bring
<PAGE>
Executive to the 35th percentile of peer companies selected by the Committee.
(b) ANNUAL INCENTIVE. Effective on the Merger Date, Executive will
be eligible to participate in the Company's annual management incentive plan (or
such other incentive plan established in place of the Company's annual
management incentive plan) at a target bonus equal to such percentage of Base
Salary as determined each year by the Committee in its discretion. The actual
amount of the annual bonus award, if any, for a fiscal year shall be dependent
upon the achievement of certain financial standards of performance for the
operations of the Company, the achievement of certain non-financial objectives
mutually agreed upon by Executive and the Company at the beginning of the fiscal
year and a discretionary component for performance above targets. For the 1997
fiscal year, the incentive standards and target goals for Executive shall be
mutually agreed upon by Executive and the Company within sixty (60) days after
the Merger Date and Executive shall be entitled to receive a bonus award not
less than fifty thousand dollars ($50,000) assuming achievement of the financial
standards of performance and 100% of the agreed upon non-financial objectives.
No bonus award for the 1997 fiscal year shall be awarded if Executive fails to
achieve at least 85% of the agreed upon non-financial objectives. The Committee
will review Executive's performance from time to time and assuming satisfactory
performance, additional bonus awards as the Committee may determine in its sole
discretion shall be made sufficient to maintain Executive's short-term
compensation package (i.e, Base Salary plus annual bonus awards) at a level
equal to the 60th percentile of peer companies selected by the Committee.
(c) LONG-TERM INCENTIVES. As soon as practicable after the date
hereof, Executive shall receive a restricted stock award for 27,000 shares of
Class A Common Stock, par value $0.01 per share ("Class A Common Stock") of the
Company. One-third (1/3) of the restricted shares so awarded shall vest and the
risk of forfeiture on such shares shall lapse as of each of the first, second
and third anniversaries of the Merger Date, provided that Executive is still
employed on each such anniversary. In addition, effective on the Merger Date,
Executive shall be granted an option to purchase 35,000 shares of Class A Common
Stock of the Company at the fair market value of a share of Class A Common Stock
of the Company as of the date such option is granted. The option shall vest and
become exercisable with respect to twenty percent (20%) of the shares subject to
the option on each anniversary of the date the option is granted. The
restricted stock award and the option grant specified above shall be subject to
such other terms and conditions as may be specified in a separate agreement
providing for the award or grant, as the case may be, and the terms and
conditions relating to such award or grant, including, without limitation,
restriction on transfer of shares, vesting requirements and forfeiture, and
redemption of shares. The Committee will review Executive's performance from
time to time and assuming satisfactory performance, additional awards of long
term incentives
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in such form and in such amounts as the Committee may determine in its sole
discretion, shall be made sufficient to maintain Executive's total compensation
(i.e., Base Salary, annual bonus awards and long-term incentives) at a level
that is within the 60th to 70th percentile of compensation ranges for peer
companies selected by the Committee.
2. BENEFITS. During the Term of Employment:
(a) The Company shall furnish Executive with, and Executive shall be
allowed full use of, office facilities, automobiles, secretarial and clerical
assistance, and other Company property and services of a quality, nature and to
the extent made available to senior executive employees of the Company from time
to time;
(b) Executive shall be eligible to participate in life, health,
long-term disability insurance and severance programs, stock purchase programs,
stock option plans, qualified and non-qualified pension and retirement plans,
incentive compensation programs and other fringe benefit programs, if any,
available to other senior executive employees of the Company and physicians
employed by medical clinics that are party to a practice management agreement
with the Company or any Subsidiaries thereof;
(c) Executive shall be allowed 4 weeks of vacation and paid leaves of
absence on the same basis as other senior executive employees of the Company;
and
(d) Company will reimburse Executive for reasonable business expenses
in performing Executive's duties and promoting the business of Company,
including, without limitation, reasonable entertaining expenses, automobile
expenses, and travel and lodging, when incurred. The cost of these items shall
be borne by the Company upon presentation of an itemized expense voucher.
3. TERM OF EMPLOYMENT. As used herein, the phrase "Term of Employment"
shall mean the period commencing on the Merger Date and ending three (3) years
from the Merger Date. The Company shall provide Executive with at least ninety
(90) days notice of its intent not to renew this Agreement. Notwithstanding the
foregoing, the Term of Employment shall expire on the first to occur of the
following:
(a) TERMINATION WITHOUT CAUSE. Notwithstanding anything to the
contrary in this Agreement, whether express or implied, the Company may at any
time terminate Executive's employment with the Company by giving Executive at
least sixty (60) days prior written notice of the effective date of termination.
In the event of such termination, Executive shall be entitled to receive his
Base Salary (at the rate in effect immediately prior to such notice) during the
period commencing on the effective date of such termination and ending on the
first anniversary of such date (the "Severance
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Period") as though Executive's employment had continued. Executive shall also
be entitled to continue to be covered by all medical, health and accident and
disability insurance, at the same coverage level maintained for Executive's
benefit immediately prior to the date of Executive's termination, until the end
of the Severance Period. In the event Executive is ineligible under the terms
of such insurance to continue to be so covered, the Company shall provide
Executive with substantially equivalent coverage through other sources or will
provide the Executive with a lump sum payment equal to the agreed upon present
value of the continuation of such insurance coverages to which Executive is
entitled under this section 4(a).
(b) TERMINATION FOR CAUSE. The Company shall have the right to
terminate Executive's employment at any time for Cause by giving Executive
written notice of the effective date of termination (which effective date may,
except as otherwise provided below, be the date of such notice). For purposes
of this Agreement, Cause shall mean:
(i) fraud, misappropriation, embezzlement or other act of
material misconduct against the Company or any of its affiliates thereof or an
act contrary to their best interests;
(ii) substantial and willful failure to render services in
accordance with the terms of this Agreement, provided that (A) a demand for
performance of services had been delivered to the Executive by the Chief
Executive Officer of the Company at least thirty (30) days prior to termination
identifying the manner in which such Chief Executive Officer believes that the
Executive has failed to perform and (B) the Executive has thereafter failed to
remedy such failure to perform;
(iii) willful and knowing violation of any rules or regulations
of any governmental or regulatory body material to the business of the Company;
or
(iv) conviction of or plea of guilty or nolo contendere to a
felony.
If Company terminates Executive's employment for any of the reasons set forth in
this Section 4(b), Company shall have no further obligations hereunder from and
after the effective date of termination and shall have all other rights and
remedies available under this or any other agreement and at law or in equity.
If Executive's employment is terminated for Cause (as defined above) and
Executive does not consent to such termination, such termination shall not be
considered effective and Executive's rights under this Agreement during the Term
of Employment shall continue (including, without limitation, the provisions of
Sections 2 and 3 hereof) until the existence of such Cause has been determined
by an independent arbitrator appointed by the American Arbitration Association
and either party's rights to petition a
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court of law for a decision in the matter have been exhausted. In connection
with the appointment of an arbitrator, both parties agree to submit the question
to final and binding arbitration by an appointee of the American Arbitration
Association and to cooperate with the arbitrator, with all costs of arbitration
paid by the Company. If the arbitrator determines that the Executive's
termination was for Cause, then the Executive shall repay to the Company all
compensation received pursuant to Section 2 during the period commencing upon
the Executive's termination and ending upon the arbitrator's final
determination. The Executive shall also repay to the Company all amounts that
it paid or reimbursed the Executive pursuant to Section 6.
(c) TERMINATION ON ACCOUNT OF DEATH. In the event of Executive's
death while in the employ of the Company, the Company shall pay to the
Executive's Designated Beneficiaries (as defined below) one hundred percent
(100%) of Executive's Base Salary as in effect immediately prior to Executive's
death, payable to Executive's Designated Beneficiary at the beginning of each
month for a period of twelve (12) months following Executive's death or until
the end of the Term of Employment, whichever is sooner. In addition,
Executive's surviving spouse, if any, shall continue to be covered by all
medical, health and accident insurance, and for the same coverage, maintained
for Executive's benefit immediately prior to the date of Executive's death, for
a period of twelve (12) months thereafter. In the event Executive's surviving
spouse is ineligible under the terms of such insurance to continue to be so
covered, the Company shall provide substantially equivalent coverage through
other sources or will provide the Executive's surviving spouse with a lump sum
payment equal to the agreed upon present value of the continuation of such
insurance coverages under this Section 4(c).
(d) VOLUNTARY TERMINATION BY EXECUTIVE. In the event that
Executive's employment with the Company is voluntarily terminated by Executive,
the Company shall have no further obligations hereunder from and after the
effective date of such termination and shall have all other rights and remedies
available under this or any other agreement and at law or in equity.
5. CHANGE IN CONTROL. In the event of a Change in Control of the
Company, Executive shall be entitled to benefits provided under the Company's
Change in Control Plan and the agreement Employee has executed pursuant to that
plan.
6. EXPENSES. The Company will pay or reimburse the Executive for all
costs and expenses (including court costs and reasonable attorneys' fees)
incurred by the Executive as a result of any claim, action or proceeding arising
out of, or challenging the validity or enforceability of, this Agreement or any
provision hereof.
7. MITIGATION. In the event of a termination of Executive's employment
for any reason, Executive shall not be required to seek
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other employment; in addition, no amount payable under Section 4 of this
Agreement shall be reduced by any compensation earned by Executive as a result
of employment by another employer after such termination of employment with the
Company.
8. DESIGNATED BENEFICIARY. In the event of the death of Executive while
in the employ of the Company, or at any time thereafter during which amounts
remain payable to the Executive under Section 4(a) or (c) hereof, such payments
shall thereafter be made to such person or persons as the Executive may
specifically designate (successively or contingently) to receive payments under
this Agreement following the Executive's death by filing a written beneficiary
designation with the Company during the Executive's lifetime. Such beneficiary
designation shall be in such form as may be prescribed by the Company and may be
amended from time to time or may be revoked by the Executive pursuant to written
instruments filed with the Company during his lifetime. Beneficiaries
designated by Executive may be any natural or legal person or persons, including
a fiduciary, such as a trustee or a trust or the legal representative of an
estate. Unless otherwise provided by the beneficiary designation filed by
Executive, if all of the persons so designated die before Executive on the
occurrence of a contingency not contemplated in such beneficiary designation,
then the amount payable under this Agreement shall be paid to the Executive's
estate.
9. MISCELLANEOUS. This Agreement shall also be subject to the following
miscellaneous considerations:
(a) The Company represents and warrants to Executive that it has the
authorization, power and right to deliver, execute and fully perform its
obligations under this Agreement in accordance with its terms.
(b) Except as provided in Section 5, this Agreement contains a
complete statement of all the arrangements between the parties with respect to
Executive's employment by the Company, this Agreement supersedes all prior and
existing negotiations and agreements between them concerning the Executive's
employment, and this Agreement can only be changed or modified pursuant to a
written instrument executed by each of the parties hereto.
(c) If any provisions of this Agreement or any portion hereof is
declared invalid, illegal or incapable of being enforced by any court of
competent jurisdiction, the remainder of such provisions and all of the
remaining provisions of this Agreement shall continue in full force and effect.
(d) This Agreement shall be governed by and construed in accordance
with the laws of the State of Oregon, except to the extent governed by federal
law.
(e) All compensation payable hereunder shall be subject to such
withholding taxes as may be required by law.
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<PAGE>
(f) This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the Company. The Company will require any
successor, whether direct or indirect, by purchase, merger, consolidation or
otherwise, to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Except as expressly provided herein,
Executive may not sell, transfer, assign, or pledge any of his rights or
interests pursuant to this Agreement.
(g) Except as otherwise provided in Section 4(b) hereof, in the event
of any dispute between the Company and the Executive with respect to any of the
provisions of this Agreement, the Company and the Executive agree that either
party may request that the dispute be resolved by submitting the issue to
arbitration or such other form of alternative dispute resolution as the parties
may agree upon (collectively, "Alternative Dispute Resolution"). The parties
expressly agree and acknowledge, however that, except as otherwise provided in
Section 4(b) hereof, nothing in this Agreement (whether express or implied)
shall under any circumstances require either party to consent to Alternative
Dispute Resolution.
(h) Any rights of Executive hereunder shall be in addition to any
rights Executive may otherwise have under benefit plans or agreements of the
Company to which he is a party or in which he is a participant, including,
without limitation, any Company sponsored employee benefit plans. Provisions of
this Agreement shall not in any way abrogate Executive's rights under such other
plans and agreements.
(i) The Company shall, to the maximum extent permitted by law,
indemnify Executive against expenses (including, without limitation, reasonable
attorneys' fees), judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceedings arising by reason of the
fact that Executive is or was an employee, officer, or agent of the Company.
The Company shall advance to Executive expenses incurred in defending any such
proceedings to the maximum extent permitted by law. The Company's obligations
under this provision shall not cease upon termination of this Agreement.
(j) Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, or prevent that party thereafter from enforcing each
and every other provision of this Agreement.
10. GUARANTEE BY CLINICS. Each of The Corvallis Clinic, P.C., HealthFirst
Medical Group, P.C. and Medford Clinic, P.C., by signing this Agreement in the
space provided below, hereby agrees to guarantee in favor of the Executive its
pro rata share of the aggregate value of compensation and benefits provided to
the Executive under this Agreement, such pro rata shares of The
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<PAGE>
Corvallis Clinic, P.C., HealthFirst Medical Group, P.C. and Medford Clinic, P.C.
being 33.8%, 42.6% and 23.6%, respectively.
IN WITNESS WHEREOF, the parties hereto have read, understood, and
voluntarily executed this Agreement as of the day and year first above written.
PHYSICIAN PARTNERS, INC.
/s/ David Kobriger By:/s/ David M. Goldberg
- ---------------------------- --------------------------
DAVID KOBRIGER Title: President, Chief Executive Officer
and Director
AGREED AND ACKNOWLEDGED:
THE CORVALLIS CLINIC, P.C.
By: /s/ David H. Cutsforth, Jr.
----------------------
Title: President
HEALTHFIRST MEDICAL GROUP, P.C.
By: /s/ Matthew Shelley
----------------------
Title: President
MEDFORD CLINIC, P.C.
By: /s/ Bruce E. Van Zee
----------------------
Title: President
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<PAGE>
EXECUTION COPY
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), is made and entered into as
of the 19th day of September, 1996, by and between Physician Partners, Inc., a
Delaware corporation (the "Company"), and Jon Ness (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive and the Company deem it to be in their respective
best interests to enter into an agreement providing for the Company's employment
of Executive pursuant to the terms herein stated.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and agreements contained herein, it is hereby agreed as follows:
1. DUTIES. The Company hereby agrees to employ Executive as its Senior
Vice President for the "Term of Employment" (as herein defined). Executive in
this capacity agrees to use his best efforts during the Term of Employment to
protect, encourage, and promote the interests of the Company. During the Term
of Employment, Executive shall also perform such other duties consistent with
the office held by Executive as may be reasonably assigned to him from time to
time by the Chief Executive Officer of the Company, and will devote substantial
time and attention to such duties, except while on sick leave, reasonable
vacations, and excused leaves of absence. During such period, Executive may
also be required to perform services for one or more affiliates of the Company.
2. COMPENSATION.
(a) BASE SALARY. Effective on the date (the "Merger Date") of the
merger of the Company with the Corvallis Clinic, P.C., HealthFirst Medical
Group, P.C. and Medford Clinic, P.C. (the "Merger"), the Company agrees to pay
to Executive a minimum base salary during the Term of Employment equal to one
hundred seventy five thousand dollars ($175,000) per year ("Base Salary"),
payable in regular installments in accordance with the Company's normal payroll
procedures. Executive's Base Salary shall be increased at the discretion of the
Compensation Committee of the Board of Directors of the Company (the
"Committee") to maintain or bring Executive to the 35th percentile of peer
companies selected by the Committee.
(b) ANNUAL INCENTIVE. Effective on the Merger Date, Executive will
be eligible to participate in the Company's annual management incentive plan (or
such other incentive plan established in place of the Company's annual
management incentive plan) at a
<PAGE>
target bonus equal to such percentage of Base Salary as determined each year by
the Committee in its discretion. The actual amount of the annual bonus award,
if any, for a fiscal year shall be dependent upon the achievement of certain
financial standards of performance for the operations of the Company, the
achievement of certain non-financial objectives mutually agreed upon by
Executive and the Company at the beginning of the fiscal year and a
discretionary component for performance above targets. For the 1997 fiscal
year, the incentive standards and target goals for Executive shall be mutually
agreed upon by Executive and the Company within sixty (60) days after the Merger
Date and Executive shall be entitled to receive a bonus award not less than
fifty thousand dollars ($50,000) assuming achievement of the financial standards
of performance and 100% of the agreed upon non-financial objectives. No bonus
award for the 1997 fiscal year shall be awarded if Executive fails to achieve at
least 85% of the agreed upon non-financial objectives. The Committee will
review Executive's performance from time to time and assuming satisfactory
performance, additional bonus awards as the Committee may determine in its sole
discretion shall be made sufficient to maintain Executive's short-term
compensation package (i.e, Base Salary plus annual bonus awards) at a level
equal to the 60th percentile of peer companies selected by the Committee.
(c) LONG-TERM INCENTIVES. As soon as practicable after the date
hereof, Executive shall receive a restricted stock award for 27,000 shares of
Class A Common Stock, par value $0.01 per share ("Class A Common Stock") of the
Company. One-third (1/3) of the restricted shares so awarded shall vest and the
risk of forfeiture on such shares shall lapse as of each of the first, second
and third anniversaries of the Merger Date, provided that Executive is still
employed on each such anniversary. In addition, effective on the Merger Date,
Executive shall be granted an option to purchase 35,000 shares of Class A Common
Stock of the Company at the fair market value of a share of Class A Common Stock
of the Company as of the date such option is granted. The option shall vest and
become exercisable with respect to twenty percent (20%) of the shares subject to
the option on each anniversary of the date the option is granted. The
restricted stock award and the option grant specified above shall be subject to
such other terms and conditions as may be specified in a separate agreement
providing for the award or grant, as the case may be, and the terms and
conditions relating to such award or grant, including, without limitation,
restriction on transfer of shares, vesting requirements and forfeiture, and
redemption of shares. The Committee will review Executive's performance from
time to time and assuming satisfactory performance, additional awards of long
term incentives in such form and in such amounts as the Committee may determine
in its sole discretion, shall be made sufficient to maintain
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<PAGE>
Executive's total compensation (i.e., Base Salary, annual bonus awards and
long-term incentives) at a level that is within the 60th to 70th percentile of
compensation ranges for peer companies selected by the Committee.
3. BENEFITS. During the Term of Employment:
(a) The Company shall furnish Executive with, and Executive shall be
allowed full use of, office facilities, automobiles, secretarial and clerical
assistance, and other Company property and services of a quality, nature and to
the extent made available to senior executive employees of the Company from time
to time;
(b) Executive shall be eligible to participate in life, health,
long-term disability insurance and severance programs, stock purchase programs,
stock option plans, qualified and non-qualified pension and retirement plans,
incentive compensation programs and other fringe benefit programs, if any,
available to other senior executive employees of the Company and physicians
employed by medical clinics that are party to a practice management agreement
with the Company or any Subsidiaries thereof;
(c) Executive shall be allowed 4 weeks of vacation and paid leaves of
absence on the same basis as other senior executive employees of the Company;
and
(d) Company will reimburse Executive for reasonable business expenses
in performing Executive's duties and promoting the business of Company,
including, without limitation, reasonable entertaining expenses, automobile
expenses, and travel and lodging, when incurred. The cost of these items shall
be borne by the Company upon presentation of an itemized expense voucher.
4. TERM OF EMPLOYMENT. As used herein, the phrase "Term of Employment"
shall mean the period commencing on the Merger Date and ending three (3) years
from the Merger Date. The Company shall provide Executive with at least ninety
(90) days notice of its intent not to renew this Agreement. Notwithstanding the
foregoing, the Term of Employment shall expire on the first to occur of the
following:
(a) TERMINATION WITHOUT CAUSE. Notwithstanding anything to the
contrary in this Agreement, whether express or implied, the Company may at any
time terminate Executive's employment with the Company by giving Executive at
least sixty (60) days prior written notice of the effective date of termination.
In the event of such termination, Executive shall be entitled to receive his
Base Salary (at the rate in effect immediately prior to such notice) during the
period commencing on the effective date of such termination and ending on the
first anniversary of such date (the "Severance
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<PAGE>
Period") as though Executive's employment had continued. Executive shall also
be entitled to continue to be covered by all medical, health and accident and
disability insurance, at the same coverage level maintained for Executive's
benefit immediately prior to the date of Executive's termination, until the end
of the Severance Period. In the event Executive is ineligible under the terms
of such insurance to continue to be so covered, the Company shall provide
Executive with substantially equivalent coverage through other sources or will
provide the Executive with a lump sum payment equal to the agreed upon present
value of the continuation of such insurance coverages to which Executive is
entitled under this section 4(a).
(b) TERMINATION FOR CAUSE. The Company shall have the right to
terminate Executive's employment at any time for Cause by giving Executive
written notice of the effective date of termination (which effective date may,
except as otherwise provided below, be the date of such notice). For purposes
of this Agreement, Cause shall mean:
(i) fraud, misappropriation, embezzlement or other act of
material misconduct against the Company or any of its affiliates thereof or an
act contrary to their best interests;
(ii) substantial and willful failure to render services in
accordance with the terms of this Agreement, provided that (A) a demand for
performance of services had been delivered to the Executive by the Chief
Executive Officer of the Company at least thirty (30) days prior to termination
identifying the manner in which such Chief Executive Officer believes that the
Executive has failed to perform and (B) the Executive has thereafter failed to
remedy such failure to perform;
(iii) willful and knowing violation of any rules or regulations
of any governmental or regulatory body material to the business of the Company;
or
(iv) conviction of or plea of guilty or nolo contendere to a
felony.
If Company terminates Executive's employment for any of the reasons set forth in
this Section 4(b), Company shall have no further obligations hereunder from and
after the effective date of termination and shall have all other rights and
remedies available under this or any other agreement and at law or in equity.
If Executive's employment is terminated for Cause (as defined above) and
Executive does not consent to such termination, such termination shall not be
considered effective and Executive's rights under this Agreement during the Term
of Employment shall continue (including, without limitation, the provisions of
Sections 2 and 3 hereof) until the existence of such Cause has been determined
by an independent arbitrator appointed by the American Arbitration Association
and either party's rights to petition a
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<PAGE>
court of law for a decision in the matter have been exhausted. In connection
with the appointment of an arbitrator, both parties agree to submit the question
to final and binding arbitration by an appointee of the American Arbitration
Association and to cooperate with the arbitrator, with all costs of arbitration
paid by the Company. If the arbitrator determines that the Executive's
termination was for Cause, then the Executive shall repay to the Company all
compensation received pursuant to Section 2 during the period commencing upon
the Executive's termination and ending upon the arbitrator's final
determination. The Executive shall also repay to the Company all amounts that
it paid or reimbursed the Executive pursuant to Section 6.
(c) TERMINATION ON ACCOUNT OF DEATH. In the event of Executive's
death while in the employ of the Company, the Company shall pay to the
Executive's Designated Beneficiaries (as defined below) one hundred percent
(100%) of Executive's Base Salary as in effect immediately prior to Executive's
death, payable to Executive's Designated Beneficiary at the beginning of each
month for a period of twelve (12) months following Executive's death or until
the end of the Term of Employment, whichever is sooner. In addition,
Executive's surviving spouse, if any, shall continue to be covered by all
medical, health and accident insurance, and for the same coverage, maintained
for Executive's benefit immediately prior to the date of Executive's death, for
a period of twelve (12) months thereafter. In the event Executive's surviving
spouse is ineligible under the terms of such insurance to continue to be so
covered, the Company shall provide substantially equivalent coverage through
other sources or will provide the Executive's surviving spouse with a lump sum
payment equal to the agreed upon present value of the continuation of such
insurance coverages under this Section 4(c).
(d) VOLUNTARY TERMINATION BY EXECUTIVE. In the event that
Executive's employment with the Company is voluntarily terminated by Executive,
the Company shall have no further obligations hereunder from and after the
effective date of such termination and shall have all other rights and remedies
available under this or any other agreement and at law or in equity.
5. CHANGE IN CONTROL. In the event of a Change in Control of the
Company, Executive shall be entitled to benefits provided under the Company's
Change in Control Plan and the agreement Employee has executed pursuant to that
plan.
6. EXPENSES. The Company will pay or reimburse the Executive for all
costs and expenses (including court costs and reasonable attorneys' fees)
incurred by the Executive as a result of any claim, action or proceeding arising
out of, or challenging the validity or enforceability of, this Agreement or any
provision hereof.
7. MITIGATION. In the event of a termination of Executive's employment
for any reason, Executive shall not be required to seek
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<PAGE>
other employment; in addition, no amount payable under Section 4 of this
Agreement shall be reduced by any compensation earned by Executive as a result
of employment by another employer after such termination of employment with the
Company.
8. DESIGNATED BENEFICIARY. In the event of the death of Executive while
in the employ of the Company, or at any time thereafter during which amounts
remain payable to the Executive under Section 4(a) or (c) hereof, such payments
shall thereafter be made to such person or persons as the Executive may
specifically designate (successively or contingently) to receive payments under
this Agreement following the Executive's death by filing a written beneficiary
designation with the Company during the Executive's lifetime. Such beneficiary
designation shall be in such form as may be prescribed by the Company and may be
amended from time to time or may be revoked by the Executive pursuant to written
instruments filed with the Company during his lifetime. Beneficiaries
designated by Executive may be any natural or legal person or persons, including
a fiduciary, such as a trustee or a trust or the legal representative of an
estate. Unless otherwise provided by the beneficiary designation filed by
Executive, if all of the persons so designated die before Executive on the
occurrence of a contingency not contemplated in such beneficiary designation,
then the amount payable under this Agreement shall be paid to the Executive's
estate.
9. MISCELLANEOUS. This Agreement shall also be subject to the following
miscellaneous considerations:
(a) The Company represents and warrants to Executive that it has the
authorization, power and right to deliver, execute and fully perform its
obligations under this Agreement in accordance with its terms.
(b) Except as provided in Section 5, this Agreement contains a
complete statement of all the arrangements between the parties with respect to
Executive's employment by the Company, this Agreement supersedes all prior and
existing negotiations and agreements between them concerning the Executive's
employment, and this Agreement can only be changed or modified pursuant to a
written instrument executed by each of the parties hereto.
(c) If any provisions of this Agreement or any portion hereof is
declared invalid, illegal or incapable of being enforced by any court of
competent jurisdiction, the remainder of such provisions and all of the
remaining provisions of this Agreement shall continue in full force and effect.
(d) This Agreement shall be governed by and construed in accordance
with the laws of the State of Oregon, except to the extent governed by federal
law.
(e) All compensation payable hereunder shall be subject to such
withholding taxes as may be required by law.
-6-
<PAGE>
(f) This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the Company. The Company will require any
successor, whether direct or indirect, by purchase, merger, consolidation or
otherwise, to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Except as expressly provided herein,
Executive may not sell, transfer, assign, or pledge any of his rights or
interests pursuant to this Agreement.
(g) Except as otherwise provided in Section 4(b) hereof, in the event
of any dispute between the Company and the Executive with respect to any of the
provisions of this Agreement, the Company and the Executive agree that either
party may request that the dispute be resolved by submitting the issue to
arbitration or such other form of alternative dispute resolution as the parties
may agree upon (collectively, "Alternative Dispute Resolution"). The parties
expressly agree and acknowledge, however that, except as otherwise provided in
Section 4(b) hereof, nothing in this Agreement (whether express or implied)
shall under any circumstances require either party to consent to Alternative
Dispute Resolution.
(h) Any rights of Executive hereunder shall be in addition to any
rights Executive may otherwise have under benefit plans or agreements of the
Company to which he is a party or in which he is a participant, including,
without limitation, any Company sponsored employee benefit plans. Provisions of
this Agreement shall not in any way abrogate Executive's rights under such other
plans and agreements.
(i) The Company shall, to the maximum extent permitted by law,
indemnify Executive against expenses (including, without limitation, reasonable
attorneys' fees), judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceedings arising by reason of the
fact that Executive is or was an employee, officer, or agent of the Company.
The Company shall advance to Executive expenses incurred in defending any such
proceedings to the maximum extent permitted by law. The Company's obligations
under this provision shall not cease upon termination of this Agreement.
(j) Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, or prevent that party thereafter from enforcing each
and every other provision of this Agreement.
10. GUARANTEE BY CLINICS. Each of The Corvallis Clinic, P.C., HealthFirst
Medical Group, P.C. and Medford Clinic, P.C., by signing this Agreement in the
space provided below, hereby agrees to guarantee in favor of the Executive its
pro rata share of the aggregate value of compensation and benefits provided to
the Executive under this Agreement, such pro rata shares of The
-7-
<PAGE>
Corvallis Clinic, P.C., HealthFirst Medical Group, P.C. and Medford Clinic, P.C.
being 33.8%, 42.6% and 23.6%, respectively.
IN WITNESS WHEREOF, the parties hereto have read, understood, and
voluntarily executed this Agreement as of the day and year first above written.
PHYSICIAN PARTNERS, INC.
/s/ Jon Ness By: /s/ David M. Goldberg
- ---------------------------------- -----------------------------------
JON NESS Title: President, Chief Executive
Officer and Director
AGREED AND ACKNOWLEDGED:
THE CORVALLIS CLINIC, P.C.
By: /s/ David H. Cutsforth, Jr.
-------------------------------
Title: President
HEALTHFIRST MEDICAL GROUP, P.C.
By: /s/ Matthew Shelley
-------------------------------
Title: President
MEDFORD CLINIC, P.C.
By: /s/ Bruce E. Van Zee
-------------------------------
Title: President
-8-
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT PAGE 1
MEDFORD CLINIC & JON D. NESS
EMPLOYMENT AGREEMENT
This agreement, made and entered into as of the 22 day of June, 1995 between
Medford Clinic, P.C., hereinafter referred to as "employer", and Jon D.Ness,
hereinafter referred to as "Employee",
WITNESS:
WHEREAS, Employer is a Oregon professional corporation rendering medical
services in the State of Oregon; and
WHEREAS, Employer desires to employ
Employee as its Executive Director upon the terms and conditions hereinafter
set forth, and Employee desires to accept such employment,
NOW, THEREFORE, Employer and Employee agree as follows:
1. EMPLOYMENT AND DUTY: Employer hereby employs Employee and Employee
hereby accepts employment as Executive Director of Medford Clinic, P.C..
Employee agrees to devote his full time and attention to his duties as Executive
Director for Employer. Any outside consulting or other employment utilizing the
professional skills of Employee must be pre-approved by the Board of
Directors and in no case will be done on Employer's time or utilizing Employer's
other employees or resources. Employee's duties shall include, but not be
limited to, the planning, coordinating, and administering of policies,
procedures, growth and development relating to all aspects of finance, business,
labor and medical clinic operations for Medford Clinic, P.C., in consultation
with and under the direction of Employer's Board of Directors. Attachment "A"
represents a more detailed job description of Employer's duties.
2. COMPENSATION: Employer shall pay Employee a salary of $140,000 per
annum payable on a biweekly basis. Periodic evaluation, no less than annually,
by the Board of Directors will determine subsequent compensation adjustments
and incentive criteria.
<PAGE>
EMPLOYMENT AGREEMENT PAGE 2
MEDFORD CLINIC & JON D. NESS
3. EXPENSES: Employer shall pay Employee's job related expenses as
reported to and approved by the Board of Directors. In addition to such
expenses, Employer shall reimburse Employee reasonable expenses for attending
two (2) professional and educational meetings per annum for the purpose of
maintaining or improving Employee's skills as an Executive Director. Employee is
responsible for reporting such expenses to the Board during annual evaluation.
Employer shall pay Employee's dues and expenses of membership in civic groups as
approved by the Board.
4. OTHER BENEFITS: During the term of this Agreement, in addition to
Employee's monthly compensation, Employer shall provide Employee with the
following:
A. Employer shall provide health insurance to employee and his immediate
family of the same type and on the same terms as employer's physician
employees.
B. Employer shall provide Employee with long-term disability insurance of
the same type and on the same terms as employer's physician employees.
C. At such time as Employee becomes eligible to participate in any
pension or profit sharing plans that Employer maintains for its other
employees, Employer shall contribute to such plans for Employee such
amounts as are required for eligible employees under said plans.
D. Employer shall provide Employee with $100,000 term life insurance
policy.
E. Employee is eligible for all other benefits on the same terms as other
employees of Medford Clinic. Extended sick time will accrue to a maximum of
170 hours.
5. INCENTIVE COMPENSATION: In addition to salary, Employer will pay
Employee an equal amount that annualized average FTE shareholder income exceeds
$140,000 in the first 12 months of employee's employment. Incentive compensation
is void in case of death or disability and employee will forfeit if the non
competition agreement (section 10) is violated.
6. PAID TIME OFF (PTO): In lieu of sick leave, holidays, and vacation,
employee will accrue 1.154 days of PTO per pay period to a maximum of 30 days
per year. Paid time off will accumulate from year to year to a maximum of 480
hours.
<PAGE>
EMPLOYMENT AGREEMENT PAGE 3
MEDFORD CLINIC & JON D. NESS
If Employee is eligible for severance pay (per section 7), the amount of PTO due
employee will reduce the severance pay by the amount of PTO paid.
7. TERM OF EMPLOYMENT: Employee's term of employment hereunder shall
commence on August 14, 1995 and shall continue thereafter until terminated as
provided herein. Either party may terminate this Agreement for any reason and
without cause upon sixty (60) days written notice to the other party. Upon
termination of Employee's employment, Employee shall be entitled to receive any
compensation accrued, including compensation for accrued but unused PTO, as of
the date of termination. Additionally, if Employee involuntarily terminates
without cause during the first eighteen (18) months of this agreement, Employee
shall be entitled to twelve (12) months severance pay (minus PTO due Employee
per section 6). If Employee involuntarily terminates without cause after
eighteen (18) months of employment, Employee shall be entitled to six (6) months
severance pay (minus PTO due Employee per section 6). If Employee is terminated
for willful misconduct, as determined by Employer, Employee is not eligible for
severance pay. If Employer's obligation to Employee for the term of severance
pay above are not already satisfied, the obligation will cease on the first date
of Employee's full time employment by another employer.
8. MOVING EXPENSES: Employer shall pay reasonable costs, not to exceed
$10,000, for shipping Employee's typical household belongings to Medford from
his present place of residence. Employer reserves the right to make such
shipping arrangements.
9. MEDICAL EXAMINATION: Medford Clinic policy requires a periodic health
examination of Executive Director and physician employees. The examination may
be provided by the personal physician of employee's choice.
10. NON-COMPETITION AGREEMENT: As inducement for Employer to hire
Employee, Employee agrees that upon termination of this agreement for any
reason, Employee shall not take a job in medical management for another
employer, nor act in any capacity in health care consulting, in Jackson or
Josephine County, Oregon for a period of eighteen (18) months without consent of
Employer. Employee must give ten (10) days notice to Employer before accepting
new employment so that Employer may determine whether such new employment
violates the terms of this agreement.
<PAGE>
EMPLOYMENT AGREEMENT PAGE 4
MEDFORD CLINIC & JON D. NESS
11. CONFIDENTIALITY: Employee has fiduciary responsibility to Employer
and will not use or reveal fiduciary information that could harm Employer.
Employee understands and agrees that all of Employer's records are strictly
confidential and Employee shall maintain the confidentiality of all such records
during the term of this Agreement and thereafter. All memos, documents, business
plans and other papers created by Employee during the term of his employment
are the property of Employer and will be turned over to Employer at the
termination of employment.
12. NOTICES: All notices required or permitted to be given under this
Agreement shall be given by certified mail, return receipt requested, to the
parties at the following addresses or to such other addresses as either may
designate in writing to the other party:
Employer: Medford Clinic, P.C.
555 Black Oak Dr.
Medford, OR 97504
Employee: Jon D. Ness
2707 Hoover Ave.
Billings, MT 59102
13. WAIVER OF BREACH: The waiver by either party of the breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by either party. No waiver or modification of this agreement
shall be valid unless in writing and signed by both parties.
14. SUCCESSION: This Agreement shall inure to the benefit of, and be
binding upon the parties, their successor, heirs, personal representatives and
assigns.
15. ARBITRATION: Any disputes arising out of interpretation or
application of this Agreement or any employment relationships shall be settled
by one arbitrator under the Commercial Arbitration Rules of the American
Arbitration Association. The cost of the arbitrator shall be shared equally by
the parties. The decision of the arbitrator shall be final and binding upon the
parties.
<PAGE>
EMPLOYMENT AGREEMENT PAGE 5
MEDFORD CLINIC & JON D. NESS
16. ATTORNEYS' FEES: If any legal proceedings, including arbitration,
shall be instituted to enforce or interpret this Agreement, the prevailing party
shall be entitled to recover from the losing party such sums as the court or
arbitrator may adjudge reasonable for attorneys' fees in such legal or
arbitration proceedings, including attorneys' fees on appeal.
17. GOVERNING LAW: This Agreement is drawn to be effective in and shall
be construed in accordance with the laws of the State of Oregon.
18. ASSIGNMENT OF CONTRACT: This contract is not assignable by Employee
to any other individual.
19. ENTIRE AGREEMENT: This Agreement constitutes the entire understanding
and agreement between the parties, and no amendment or variation of the terms of
this Agreement shall be valid unless made in writing and signed by Employee and
a duly authorized representative of Employer.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
date first herein above mentioned.
Medford Clinic, P.C.
by /s/ B. Van Zee, M.D. /s/ Jon Ness
--------------------------- ----------------
Bruce E. Van Zee, M.D. "Employee"
President
<PAGE>
LAND SALE CONTRACT
DATED AS OF: May 1, 1996
BETWEEN: HEALTHFIRST MEDICAL GROUP, P.C.
265 North Broadway
Portland, OR 97227 ("Seller")
AND: HEALTHFIRST PROPERTIES, L.L.C
265 North Broadway
Portland, OR 97227 ("Purchaser")
Seller owns the real properties legally described on the attached
Exhibit A (the "Broadway Property"), Exhibit B (the "Westside Property") and
Exhibit C (The "Tualatin Property") (individually a "Property" and collectively,
the "Properties").
Seller desires to sell the Properties to Purchaser and Purchaser
desires to buy the Properties from Seller for the price and on the terms and
conditions set forth in this Contract of Sale (the "Contract").
Seller and Purchaser also contemplate that, upon Purchaser's purchase
of the Properties, purchaser shall immediately lease the Properties to Seller.
SECTION 1 PURCHASE PRICE: PAYMENT
1.1 TOTAL PURCHASE PRICE
Purchaser promises to pay Seller as the total Purchase Price for the
Properties the sum of $12,550,000 (the "Purchase Price"), which shall be
allocated $2,550,000 to the Broadway Property, $3,550,000 to the Westside
Property, and $6,450,000 to the Tualatin Property.
1.2 PAYMENT OF PURCHASE PRICE
The Purchase Price shall be paid as follows:
1.2.1 Purchaser shall pay not later than thirty (30) days following
the Closing Date (hereinafter defined) a sum equal to the initial capital
contributions made by Purchaser's members on or before such date as a down
payment toward the Purchase Price (the "Down Payment Amount"), which shall be
allocated twenty percent (20%) to the Broadway Property, twenty-eight percent
(28%) to the Westside Property, and fifty-two percent (52%) to the Tualatin
Property.
1.2.2 Interest on the remaining principal balance shall accrue at the
rate of eight (8) percent (8%) per annum from the
LAND SALE CONTRACT
<PAGE>
Closing Date until paid in full. The unpaid balance of the Purchase Price shall
be paid in equal principal and interest installments based on a twenty (20) year
amortization period, with the first installment due on June 1, 1996 and with
subsequent installments due on the first day of each month thereafter through
and including the Maturity Date (hereinafter defined). Unless otherwise
directed by Purchaser in writing, Seller shall apply all installments ratably to
the amount owing as the purchase price for the Broadway Property, Westside
Property and Tualatin Property in the percentages set forth in Section 1.2.1.
1.2.3 The Purchase Price and all accrued but unpaid interest shall be
paid in full on or before April 30, 2016.
1.2.4 Upon closing of the transaction contemplated hereby, Purchaser
shall lease to Seller and Seller shall lease from Purchaser the Properties,
pursuant to leases substantially in the form of the lease attached hereto as
Exhibit D (collectively, the "Leases"). The Leases shall take effect and the
Lease terms shall commence on May 1, 1996.
1.3 PREPAYMENTS
Purchaser may prepay all or any portion of the unpaid principal at any
time without penalty.
1.4 PLACE OF PAYMENTS
All payments to Seller shall be made to Seller at the address of
Seller shown above or to such other place or person as Seller may designate by
written notice to Purchaser.
1.5 LATE CHARGE
If any payment required under this Contract is not received by Seller
within fifteen (15) days of the date on which such payment is due, Purchaser
shall pay to Seller on demand a late charge in an amount equal to five percent
(5%) of the overdue payment. Seller and Purchaser agree that the late charge is
intended to be a reasonable approximation of actual damages incurred by such
overdue payment, which damages are difficult to estimate.
1.6 SENIOR ENCUMBRANCES. Purchaser acknowledges that the Properties are
subject to the terms of those encumbrances set forth on the attached Exhibit E
(the "Senior Encumbrances"). This Contract wraps around, and includes in the
Purchase Price, the unpaid balance of the Senior Encumbrances. Although this
Contract is subject to the Senior Encumbrances, Purchaser has not assumed
payment of the Senior Encumbrances. So long as Purchaser is not in default
hereunder, Seller agrees to pay all installments of principal and interest due
under the Senior Encumbrances as and
LAND SALE CONTRACT 2
<PAGE>
when the same become due and payable. In the event that Seller fails to make any
payments on the Senior Encumbrances, then Purchaser shall have the right and
option (but not the obligation) to make such payments on behalf of Seller, and
an amount equal to all of such sums paid by Purchaser on the Senior Encumbrances
shall be credited against the next maturing installment(s) of principal and
interest to become due hereunder. Subject to the Leases, Purchaser shall comply
with the provisions of the instruments evidencing and securing payment of the
Senior Encumbrances that pertain to the use, ownership and operation of the
Properties and shall not act or fail to act in any manner that would constitute
a breach of such instruments. At such time as the Purchase Price for the
Properties or that portion thereof allocated to an individual Property (subject
to the requirements of section 1.2.2) is paid in full, Seller shall cause the
Senior Encumbrances relating to the Property or Properties, as applicable, to be
paid and released of record.
SECTION 2 TAXES AND LIENS
2.1 OBLIGATION TO PAY
All real property taxes and all governmental charges or other
assessments levied against the Properties for the current tax year shall be
prorated between Seller and Purchaser as of the Closing Date. Subject to the
terms of the Leases, Purchaser shall be responsible for paying when due all
taxes and assessments which are levied against the Properties after the Closing
Date. If any transfer, excise or similar documentary tax is imposed as a result
of this transaction, it shall be borne equally by the parties.
2.2 RIGHT TO CONTEST
If Purchaser objects in good faith to the validity or amount of any
tax, assessment, or lien, Purchaser, at Purchaser's sole expense, may contest
the validity or amount of the tax, assessment, or lien, provided that Seller's
security interest in the Properties is not jeopardized thereby. Purchaser shall
otherwise keep the Properties free from all liens which may be lawfully imposed
upon the Properties after the Closing Date, other than the lien of current taxes
not yet due and payable.
2.3 TAX STATEMENTS
Subject to the terms of the Leases, Purchaser shall provide Seller
with written evidence that all taxes and assessments have been paid when due,
within thirty (30) days after each required payment of taxes and assessments.
Purchaser shall have the right to pay any taxes or assessments in accordance
with any legally permitted installment method. Taxes are to be paid on an annual
basis.
LAND SALE CONTRACT 3
<PAGE>
2.4 PAYMENTS TO THIRD PARTIES
In the event Purchaser fails to pay, when due, any amounts to be paid
by Purchaser to third parties under this contract, or any other instrument
affecting the Properties, Seller may pay any or all such amounts. If Seller
makes any such payments, the amounts so paid shall be immediately due and
payable from Purchaser. Until paid by Purchaser, such amounts shall be secured
by this Contract and shall bear interest at the rate set forth in Section 1.2.2.
SECTION 3 CLOSING
This transaction shall close on May 1, 1996 in escrow at the offices
of Fidelity Title Insurance Company in Portland, Oregon (the "Title Company").
As used in this Contract, the "Closing Date" means the date on which the Down
Payment is disbursed to Seller.
3.2 TITLE DEFECTS
In the event that Seller's interest in the Properties is subject to
any liens or encumbrances other than those which are set forth in Exhibit F
attached hereto (the "Permitted Exceptions") and Seller is unable to remove such
liens or encumbrances prior to the Closing Date, Purchaser may elect to (i)
cancel this Contract or (ii) waive the title defects.
3.3 RESPONSIBILITY OF PARTIES
At closing Purchaser shall deliver to Seller verifiable funds in the
amount of the Down Payment Amount, and Seller shall deliver to Purchaser a
commitment for the issuance of 3 standard purchaser's policies of title
insurance as described in Section 7 (the "Title Policies"). Seller and
Purchaser further agree to execute any and all additional documents and take
such further steps as may be necessary to effect the transaction described in
this Contract.
3.4 PRORATES AND CLOSING COSTS
Except as otherwise provided in this Contract or the Leases, all items
to be prorated shall be prorated as of the Closing Date. Seller shall pay one-
half of the title insurance premium and one-half of any escrow fees. Purchaser
shall pay the recording fees for recording this Contract or a memorandum
thereof, the recording fees for recording the Leases or a memorandum thereof,
one-half of the title insurance premium and one-half of any escrow fees.
LAND SALE CONTRACT 4
<PAGE>
SECTION 4 POSSESSION: INDEMNIFICATION
4.1 POSSESSION
Subject to the terms of the Leases, Purchaser shall be entitled to
possession of the Properties from and after the Closing Date.
4.2 PURCHASER'S INDEMNIFICATION
Subject to the terms of the Leases, Purchaser agrees to defend,
indemnify and hold Seller harmless from any claim, loss or liability arising out
of Purchaser's possession or use of the Properties or conduct with respect to
the Properties after the Closing Date. In the event that any litigation or
proceeding is brought against Seller arising out of or in any way connected with
any of the above events or claims, Purchaser, upon written request from Seller,
agrees to vigorously resist and defend such actions or proceedings through legal
counsel reasonably satisfactory to Seller.
4.3 SELLER'S INDEMNIFICATION
Seller agrees to defend, indemnify and hold Purchaser harmless from
any claim, loss or liability arising out of Seller's possession or use of the
Properties or conduct with respect to the Properties prior to the Closing Date.
In the event that any litigation or proceeding is brought against Purchaser
arising out of or in any way connected with any of the above events or claims,
Seller, upon written notice from Purchaser, agrees to vigorously resist and
defend such actions or proceedings through legal counsel reasonably satisfactory
to Purchaser.
SECTION 5 MAINTENANCE
Subject to the terms of the Leases, commencing on the Closing Date and
continuing thereafter at all times during the term of this Contract, Purchaser
shall do the following:
5.1 MAINTENANCE OF PROPERTIES
Purchaser shall not commit or suffer any waste of the Properties and
shall maintain the Properties in good condition.
5.2 MAINTENANCE OF IMPROVEMENTS
Purchaser shall keep all buildings, other improvements, and
landscaping now existing or which shall be placed on the Properties in good
condition and repair and shall not permit any waste or removal of any
improvements, or make any alterations which reduce the value of the Properties
for security purposes without
LAND SALE CONTRACT 5
<PAGE>
the prior written consent of Seller, which consent shall not be unreasonably
withheld or delayed.
5.3 COMPLIANCE WITH LAWS
Purchaser shall promptly comply with all laws, ordinances,
regulations, directives, rules, and other requirements of all governmental
authorities applicable to the use, possession, ownership or occupancy of the
Properties, and in this connection promptly make all required repairs,
alterations, and additions. Purchaser may contest in good faith any requirement
and withhold compliance during any proceeding, including appropriate appeals, so
long as Seller's interest in the Properties is not jeopardized thereby.
SECTION 6 INSURANCE
Subject to the terms of the Leases, the following insurance provisions
shall apply:
6.1 PROPERTY DAMAGE INSURANCE
Purchaser shall procure and maintain policies of fire insurance with
standard extended coverage endorsements covering losses due to fire, explosions,
winds, and storms, covering on a replacement cost basis all improvements on the
Properties in an amount sufficient to avoid application of any coinsurance
clause and with loss payable to Seller and Purchaser as their respective
interests may appear. Purchaser shall deliver to Seller certificates of
coverage from each insurer containing a stipulation that coverage will not be
canceled or diminished without a minimum of ten (10) days written notice to
Seller. In the event of loss, Purchaser shall promptly give written notice to
Seller. In the event that Purchaser fails to make proof of loss within fifteen
(15) days of a casualty, Seller may make such proof of loss.
6.2 APPLICATION OF PROCEEDS
All insurance proceeds shall be paid to and held by Seller. Any
insurance proceeds received by Seller, less any costs of collecting the same,
shall be made available to Purchaser to be used to restore or replace the
damaged Property. Any proceeds paid to Seller which have not been paid out by
Seller within one hundred twenty (120) days after their receipt, or which
Purchaser has not committed to the repair or restoration of the damaged Property
within such period, shall be applied to the indebtedness evidenced by this
Contract.
6.3 LIABILITY INSURANCE
During the term of this Contract, Purchaser shall maintain public
liability and property damage insurance with
LAND SALE CONTRACT 6
<PAGE>
combined limits of not less than $2,000,000.00. Such insurance shall cover all
risks arising directly or indirectly out of Purchaser's activities on or any
condition of the Properties, and shall protect Seller and Purchaser against
claims of third persons. Purchaser shall deliver to Seller certificates of
coverage from each insurer containing a stipulation that coverage will not be
canceled or diminished without a minimum of ten (10) days written notice to
Seller.
SECTION 7 TITLE INSURANCE
Seller shall furnish, at an expense to be equally shared by the
parties, three (3) standard coverage purchaser's title insurance policies, in
the amount of the Purchase Price allocated to each Property, within ten (10)
days from the Closing Date, insuring Purchaser against loss or damage sustained
by Purchaser by reason of liens or encumbrances affecting the Properties,
excepting the Permitted Exceptions, the lien of this Contract and those liens or
encumbrances created or suffered against the Properties by Purchaser.
SECTION 8 EMINENT DOMAIN
If all or any portion of the Properties is condemned or otherwise
taken for public use, the proceeds of the condemnation award shall be paid to
Purchaser if required by the Lease or otherwise to Seller, and Purchaser or
Seller, as applicable, shall apply such proceeds to the following accounts in
order: accrued but unpaid interest on the Purchase Price; and the unpaid balance
of the Purchase Price. The remaining proceeds, if any, shall be paid to
Purchaser.
SECTION 9 DEED
Upon full payment of the Purchase Price for the Properties or that
portion thereof allocated to an individual Property (subject to the
requirements of section 1.2.2), Seller shall deliver to Purchaser a statutory
special warranty deed or deeds (individually a "Deed" and collectively, the
"Deeds") conveying the Property or Properties, as applicable, to Purchaser,
subject only to the Permitted Exceptions and those liens or encumbrances placed
or suffered against the Property or Properties, as applicable, by Purchaser.
LAND SALE CONTRACT 7
<PAGE>
SECTION 10 DEFAULT
10.1 EVENTS OF DEFAULT
Time is of the essence of this Contract. A default shall occur if:
10.1.1 Purchaser fails to make any payment required by this Contract
within fifteen (15) days after the date on which such payment is due.
10.1.2 Purchaser fails to perform any other obligation contained in
this Contract within thirty (30) days after written notice of the default or, if
the default cannot be cured within thirty (30) days, failure within such time to
commence and pursue curative action with reasonable diligence.
10.1.3 Purchaser commences a voluntary case under the federal
bankruptcy laws or under other federal or state law relating to insolvency or
debtor's relief; a decree or order for relief against Purchaser in an
involuntary case under the federal bankruptcy laws or under any other applicable
federal or state law relating to insolvency or debtor's relief is entered; or an
assignment for the benefit of creditors by Purchaser occurs.
10.1.4 Purchaser transfers or attempts to transfer, assign or convey
Purchaser's interest in this Contract or in the Properties without Seller's
prior written approval.
10.2 REMEDIES ON DEFAULT
In the event of a default, Seller may take any one or more of the
following steps:
10.2.1 Declare the entire balance of the Purchase Price, and accrued
interest, and any other amounts due to Seller from Purchaser pursuant to this
Contract immediately due an payable;
10.2.2 Foreclose this Contract by suit in equity;
10.2.3 Specifically enforce the terms of this Contract by suit in
equity;
10.2.4 After complying with the notice requirements and right to cure
the default contained in ORS 93.905 to 93.945, Seller may declare this Contract
forfeited and retain the amount of the payments previously made under this
Contract. Upon recordation of the affidavit required by Oregon law, this
Contract and the Leases shall be extinguished and canceled, and Purchaser shall
have no further right, title, or interest in or to the real property or to any
return or compensation for payments previously made under this Contract, as
though this Contract, the Leases and such payments had never been made. In such
event, Purchaser agrees to surrender the
LAND SALE CONTRACT 8
<PAGE>
Properties to Seller. If Purchaser fails to do so, Seller may elect to treat
Purchaser as a tenant holding over unlawfully after the expiration of a lease,
and Purchaser may be ousted and removed as such, without affecting Seller's
right to pursue other rights and remedies contained in this Contract or
permitted by law.
SECTION 11 CONDITION OF PROPERTY
Purchaser accepts the Properties, AS IS, without any representations
or warranties, express or implied, unless they are expressly set forth herein.
SECTION 12 MISCELLANEOUS PROVISIONS
12.1 WAIVER
Failure of Seller at any time to require performance of any provision
of this Contract shall not limit Seller's right to subsequently enforce the
provision, nor shall any waiver by Seller of any breach of any provision of this
Contract be a waiver of any succeeding breach of that provision or a waiver of
that provision itself or any other provision.
12.2 SUCCESSOR INTERESTS
This Contract shall be binding upon and inure to the benefit of the
parties, their successors, and assigns. Purchaser shall not assign, subcontract,
or otherwise transfer, voluntarily or involuntarily, any interest of Purchaser
in this Contract or the Properties without the prior written consent of Seller,
which consent shall not be unreasonably withheld or delayed.
12.3 PRIOR AGREEMENTS
This document is the entire, final, and complete agreement of the
parties pertaining to the sale and purchase of the Properties, and supersedes
and replaces all prior or existing written and oral agreements (with the
exception of the existing earnest money agreement and addendum thereto) between
the parties or their representatives relating to the Properties.
12.4 SEVERABILITY
If any term or provision of this Contract or the application thereof
to any person or circumstance shall to any extent by invalid or unenforceable,
the remainder of this Contract and the application of such term or provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable shall not be affected thereby, and each term or provision of this
Contract shall be valid and enforceable to the fullest extent permitted by law.
LAND SALE CONTRACT 9
<PAGE>
12.5 NOTICES
Any notice required, permitted, or otherwise given pursuant to this
contract shall be in writing and shall he effective when actually delivered in
person or three days after deposit in the U.S. Mail, registered or certified,
postage prepaid and addressed to the party at the address stated in this
Contract or such other address as either party may designate by written notice
to the other.
12.6 APPLICABLE LAW
This Contract has been entered into in Oregon and the Properties are
located in Oregon. The parties agree that the laws of the State of Oregon shall
be utilized in construing the Contract and enforcing the rights and remedies of
the parties.
12.7 COSTS AND ATTORNEYS' FEES
In the event Seller or Purchaser shall take any action, judicial or
otherwise, to enforce or interpret any of the terms of this Contract, the
prevailing party shall be entitled to recover from the other party all expenses
which it may reasonably incur in taking such action, including but not limited
to costs incurred in searching records, the costs of title reports and surveyors
reports, and attorneys' fees, whether incurred in a suit or action or appeal or
review from a judgment or decree therein or in connection with nonjudicial
action, in addition to all other sums provided by law.
12.8 SURVIVAL OF COVENANTS
Any covenants the full performance of which is not required prior to
the final payment of the Purchase Price shall survive the closing and be fully
enforceable thereafter in accordance with their terms.
12.9 AMENDMENT
This Contract may not be modified or amended except by the written
agreement of the parties. No modification or amendment or attempted waiver of
any provision of this Contract shall be binding unless in writing and signed by
the party to be bound.
12.10 STATUTORY DISCLAIMER
THIS INSTRUMENT WILL NOT ALLOW USE OF THE PROPERTY DESCRIBED IN THIS
INSTRUMENT IN VIOLATION OF APPLICABLE LAND USE LAWS AND REGULATIONS. BEFORE
SIGNING OR ACCEPTING THIS INSTRUMENT, THE PERSON ACQUIRING FEE TITLE TO THE
PROPERTY SHOULD CHECK WITH THE APPROPRIATE CITY OR COUNTY PLANNING DEPARTMENT TO
VERIFY
LAND SALE CONTRACT 10
<PAGE>
APPROVED USES AND TO DETERMINE ANY LIMITS ON LAWSUITS AGAINST FARMING OR FOREST
PRACTICES AS DEFINED IN ORS 30.930.
IN WITNESS WHEREOF, the parties have caused this Contract to be
executed in duplicate as of the day and year first above written.
Seller: HEALTHFIRST MEDICAL GROUP, P.C.
By: /s/ Matthew Shelley, M.D.
---------------------------
Its: President
---------------------------
Purchaser: HEALTHFIRST PROPERTIES, L.L.C.
By: /s/ Russell A. Dow, M.D.
---------------------------
Its: Manager
---------------------------
LAND SALE CONTRACT 11
<PAGE>
EXHIBIT A
Broadway Property
Lots 1 through 12, Block 17, ELIZABETH IRVING'S ADDITION TO EAST PORTLAND, in
the City of Portland, County of Multnomah and State of Oregon.
EXCEPTING THEREFROM all that portion of Lots 6 and 7 annexed by said City of
Portland for widening of North Broadway.
<PAGE>
EXHIBIT B
Westside Property
PARCEL I:
Lot 8 and that portion of Lot 9, QUADRANT EAST, Washington County, Oregon,
described as follows:
BEGINNING at the Southeast corner of said Lot 9 and running thence North 64
DEGREES 36'00" West on the South line of said Lot 9, a distance of 266.00
feet to a point on the East line of Tract "E" said plat; thence on East and
North side of said Tract "E", the following courses: North 20 DEGREES 35'43"
East, a distance of 30.00 feet; thence North 69 DEGREES 24'17" West, distance
of 30.00 feet to a point on the West line of said Lot 9; thence North 20
DEGREES 35'43" East on the West line of said Lot 9, a distance of 127.36 feet
to a point on the proposed South right-of-way line of U.S. Highway 26; thence
South 60 DEGREES 21'00" East on said South right-of-way line, a distance of
209.19 feet to an angle point; thence South 51 DEGREES 49'09" East, a
distance of 44.10 feet to the intersection point with the East line of said
Lot 9; thence South 01 DEGREES 23'46" West on said East lot line, a distance
of 141.25 feet to the point of beginning.
PARCEL II:
Lot 10, QUADRANT EAST, Washington County, Oregon.
EXCEPTING THEREFROM that portion conveyed to the State of Oregon by and through
its Department of Transportation, Highway Division, recorded March 28, 1990,
Recorder's Fee No. 90 14985.
<PAGE>
EXHIBIT C
Tualatin Property
PARCEL I:
A portion of that certain tract deeded to John J. Hinderman and Aimee
Hinderman as described in deed of record in Book 184, at Page 511, Washington
County, Oregon Deed Records, said portion being more particularly described as
follows:
BEGINNING at a point on the East line of Section 24, Township 2 South, Range
1 West of the Willamette Meridian, in Washington County, Oregon, the same
being the East line of Lot 1, TUALATIN GARDENS, 440.8 feet North of the
Southeast corner of said Lot 1, and 440.8 feet North of the Southeast
corner of Section 24; thence West 50 feet to an iron pipe at the Southwest
corner of a tract of land conveyed by deed to Washington County, Oregon,
as recorded on Page 331 of Volume 152, Deed Records of Washington
County, Oregon; thence North parallel with and 50 feet distant West from the
East line of said Lot 1, a distance of 71.8 feet to an iron pipe; thence
South 89 DEGREES 8' West parallel with the South line of said Section 24,
412 feet to a point marked by an iron pipe; thence South parallel with the
East line of said Section 24, 175 feet to a point; thence North 8908' East
462 feet to the East line of said Section 24; thence North along the East
line of said Section 24, to the point of beginning.
EXCEPTING THEREFROM that portion conveyed to the City of Tualatin by document
recorded June 20, 1973, in Book 931, Page 215.
PARCEL II:
BEGINNING at an iron rod on the West line of that certain tract of land
conveyed to Washington County by deed recorded in Book 152, Page 331,
Washington County Deed Records, which iron rod is North 440.8 feet, West 50.0
feet, and North 171.8 feet from the Southeast corner of Section 24, Township
2 South, Range 1 West of the Willamette Meridian, and is also North 171.8
feet from the Southwest corner of the said Washington County tract, and
running thence South 89 DEGREES 08' West parallel to the North line of that
certain tract of land conveyed to Perry B. Foster, Jr. and Dorothy M. Foster,
husband and wife, by deed recorded in Book 311, Page 232, said Deed Records,
a distance of 412.0 feet to an iron rod; thence South on the West line of the
said Foster tract, 100.0 feet, more or less, to the Northwest corner of that
certain tract of land conveyed to Henry E. Bursaw and Harriet G. Bursaw, by
deed recorded in Book 491, Page 266, said Deed Records; thence North 89
DEGREES 08' East along the North line of said Bursaw tract, 412.0 feet to an
iron pipe at the most Northerly Northeast corner of the said Bursaw tract,
and from which pipe the Southwest corner of the aforesaid Washington County
tract bears South 71.8 feet; thence North along the West line of the said
Washington County tract, 100.0 feet to the point of beginning.
EXCEPTING THEREFROM that portion conveyed to the City of Tualatin by document
recorded June 20, 1973, in Book 931, Page 215.
<PAGE>
PARCEL III:
BEGINNING at an iron pipe at the Southeast corner of Section 24, Township 2
South, Range 1 West of the Willamette Meridian, in the County of Washington and
State of Oregon, said beginning point being the Southeast corner of Lot 1 of
TUALATIN GARDENS, as shown on the duly recorded map and plat thereof, in the
County of Washington and State of Oregon, said beginning point being the
Southeast corner of that certain 14-acre tract of land conveyed by deed to
F. H. and LaDessa Hocken, as recorded at Page 332 of Volume 159 of Washington
County Record of Deeds, and running thence from said point of beginning North
along the East line of said Section 24 and the East line of the said Hocken
tract, 440.8 feet to the Southeast corner of that certain 0.579-acre tract of
land conveyed by deed to Washington County, Oregon, as recorded at Page 331
of Volume 152, Deed Records for said county; thence West 50.0 feet to an
iron pipe at the Southwest corner of the said Washington County tract; thence
North parallel with and 50 feet distant West from East line of said Lot 1, a
distance of 71.8 feet to an iron pipe; thence South 89 DEGREES 08' West parallel
with the South line of the said Hocken tract, 412.0 feet to an iron pipe on the
West line thereof; thence South along the West line of the said Hocken tract,
513.4 feet to the Southwest corner thereof; thence North 89o08' East along the
South line of the said Hocken tract, a distance of 462.0 feet to the place of
beginning.
EXCEPTING THEREFROM that portion thereof described in contract to Henry E.
Bursaw and Harriet G. Bursaw, recorded in Volume 450, Page 547, Deed Records of
said county.
AND FURTHER EXCEPTING THEREFROM those portions conveyed to the City of
Tualatin by documents recorded June 22, 1995 as Fee Nos. 95042799 and 95042800.
<PAGE>
EXHIBIT D
----------
MEDICAL OFFICE LEASE
----------------------
BETWEEN: HealthFirst Properties, L.L.C., whose address is 265 N. Broadway,
Portland, OR 97227
("Landlord");
AND: HealthFirst Medical Group, P.C. whose address is 265 N. Broadway,
Portland, OR 97227
("Tenant").
DATED AS OF: May 1, 1996
Landlord hereby leases to Tenant the real property legally described in the
attached Exhibit A, together with all improvements thereon, on the terms and
conditions stated below:
SECTION 1: OCCUPANCY
1.1 TERM. The term of this lease shall commence on the date of this
Agreement set forth above (the "Commencement Date") and shall expire on April
30, 2016, unless sooner terminated pursuant to the provisions hereof.
1.2 POSSESSION. Tenant's right to possession and obligations under the
lease shall commence on the Commencement Date.
SECTION 2: RENT
2.1 BASIC RENT. Beginning on the Commencement Date, Tenant
shall pay basic rent to Landlord of $ per month. Rent
shall be adjusted annually based on the annual change in the Consumer Price
Index for All Urban Consumers, published by the Bureau of Labor Statistics of
the United States Department of Labor, for Portland-Vancouver (1977=100) or any
other successor or substitute index selected by Landlord, with a cumulative
maximum yearly increase of three percent (3%), such that the rent for any lease
year shall not exceed the amount set forth on the attached Exhibit B. At no
time shall basic rent be less than the basic rent for the previous lease year.
Basic rent shall be payable on the first day of each month in advance at
such place as may be designated by Landlord.
2.2 ADDITIONAL RENT. All taxes, insurance costs, utility charges,
repairs and maintenance and any other sum which Tenant is required to pay to
Landlord or third parties shall be additional rent.
LAND SALE CONTRACT 16
<PAGE>
2.3 LATE CHARGE. If any portion of the basic rent remains unpaid for ten
(10) or more calendar days after the date on which such amount is due, Tenant
shall pay to Landlord a late charge in an amount equal to five percent (5%) of
such delinquent payment. Tenant agrees that such amount is a reasonable
estimate of Landlord's collection and administrative expenses.
SECTION 3. USE OF THE PREMISES
3.1 PERMITTED USE. The premises shall be used for medical office purposes
and uses related thereto, but for no other purpose without the prior written
consent of Landlord, which consent shall not be unreasonably withheld or
delayed.
3.2 RESTRICTIONS ON USE. In connection with its use of the premises,
Tenant shall, subject to Section 4.1:
(a) Conform to all applicable laws and regulations of
any public authority affecting the premises and
correct at Tenant's own expense any failure of
compliance created through Tenant's fault or by
reason of Tenant's use.
(b) Refrain from any use which would be reasonably
offensive to other tenants or owners or users of
neighboring premises or which would tend to create
a nuisance or damage the reputation of the
premises.
SECTION 4: REPAIRS AND MAINTENANCE
4.1 LANDLORD'S OBLIGATIONS. The premises are being leased in an "as is"
condition and Landlord shall not be liable for repairs or maintenance of the
premises or other charges, except for replacement and maintenance of the
roof, exterior walls (excluding painting), bearing walls, structural members and
foundation.
4.2 TENANT'S OBLIGATIONS. All repairs and maintenance to the premises not
otherwise the responsibility of Landlord pursuant to section 4.1 shall be the
responsibility of the Tenant including, but not limited to, the following:
(a) Repair of sidewalks, driveways, curbs and parking
areas.
(b) Repair and maintenance of water, sewage, gas and
electrical services.
(c) Repair of the heating and air conditioning system,
including ordinary maintenance.
LAND SALE CONTRACT 17
<PAGE>
(d) Repair of interior walls, ceilings, doors and
windows and related hardware, light fixtures,
switches, and wiring and plumbing.
(e) Maintain the exterior and interior of the premises
in good condition.
(f) Any repairs (including those for which Landlord
would otherwise be responsible pursuant to section
4.1) necessitated by the negligence of Tenant, its
agents, employees, and invitees.
(g) Any repairs or alterations required under Tenant's
obligation to comply with laws and regulations as
set forth in 4.2(a) above.
4.3 REIMBURSEMENT FOR REPAIRS ASSUMED. If Tenant fails or refuses to make
repairs which are required by this Section 4, the Landlord may make the repairs
and charge the actual costs of repairs to Tenant. Such expenditures by
Landlord shall be reimbursed by Tenant on demand together with interest at the
rate of twelve percent (12%) per annum from the date of expenditure by Landlord.
Except in an emergency creating an immediate risk of personal injury or property
damage, Landlord shall not perform repairs which are the obligation of Tenant
and charge the Tenant for the resulting expense unless at least fifteen (15)
days before work is commenced Tenant is given notice in writing outlining with
reasonable particularity the repairs required, and Tenant fails within that time
to initiate such repairs in good faith.
4.4 INSPECTION OF PREMISES. Landlord shall have the right to inspect the
premises at any reasonable time after reasonable notice to Tenant, to
determine the necessity of repairs and/or maintenance.
SECTION 5: ALTERATIONS
5.1 ALTERATIONS PROHIBITED. Tenant shall make no improvements or alterations
on the premises of any kind without first obtaining Landlord's written consent,
which consent shall not be unreasonably withheld or delayed.
5.2 OWNERSHIP OF ALTERATIONS. All improvements and alterations
performed on the premises by either Landlord or Tenant shall be the property
of Landlord when installed unless the applicable Landlord's consent
provides otherwise.
SECTION 6: FIRE INSURANCE
6.1 INSURANCE REQUIRED. Tenant shall keep the premises,
including all buildings, other improvements and landscape, insured
at Tenant's expense against fire and other risks covered by a
LAND SALE CONTRACT 18
<PAGE>
standard fire insurance policy with an endorsement for extended coverage. The
policy shall be written for the full insurable value, with loss payable to
Landlord, and the policy or a certificate of insurance shall be delivered
to Landlord and shall contain a stipulation providing that coverage will not be
canceled or diminished without a minimum of thirty (30) days written notice to
Landlord. Tenant shall bear the expense of any insurance insuring the
property of Tenant on the premises.
6.2 WAIVER OF SUBROGATION. So long as Tenant maintains the insurance
required by section 6.1, Tenant shall not be liable to Landlord and Landlord
shall in no event be liable to Tenant for any loss or damage caused by fire or
any of the risks enumerated in a standard fire insurance policy with an
extended coverage endorsement, and in the event of insured loss neither party's
insurance company shall have a subrogated claim against the other.
SECTION 7: TAXES AND UTILITIES
7.1 REAL PROPERTY TAXES. Tenant shall pay all real property
taxes levied against the premises within ten (10) days after
receipt of notice from Landlord of the total amount of the tax due.
7.2 PERSONAL PROPERTY TAXES. Tenant shall pay as due all taxes on its
personal property located on the premises.
7.3 SPECIAL ASSESSMENTS. If an assessment for a public improvement is
made against the premises, the assessment shall be paid by Tenant, who may elect
to cause such assessment to be paid in any legally-permitted installments.
Tenant shall only be obligated to pay such installments arising during the
term of this lease.
7.4 CONTEST OF TAXES. Tenant shall be permitted to contest the amount of
any tax so long as such contest is conducted in a manner which does not cause
any risk that Landlord's interest in the leased premises will be foreclosed for
nonpayment. Landlord, at no cost to Landlord, shall cooperate in any reasonable
manner with such contest by Tenant.
7.5 PRORATION OF TAXES. Tenant's share of real property taxes for the
year in which this lease commences or terminates shall be prorated based upon
the portion of the tax year that this lease is in effect.
7.6 UTILITY CHARGES. Tenant shall pay when due all charges for
electricity, gas, water, sanitary and storm sewage, garbage removal, telephone
service and any other utilities of any kind furnished to the premises.
SECTION 8: DAMAGE AND DESTRUCTION
LAND SALE CONTRACT 19
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8.1 PARTIAL DAMAGE. If the premises are partly damaged and paragraph 8.2
below does not apply, the premises shall be repaired by Landlord to the
condition existing prior to the damage up to, but not to exceed, the amount
of available insurance proceeds (less Landlord's reasonable expenses to
obtain such proceeds). Repairs shall be accomplished with all reasonable
dispatch subject to interruptions and delays from matters beyond the control
of Landlord. All repairs shall be done by Landlord in such a way as to
interfere as little as reasonably possible with the use of the premises by
Tenant.
8.2 DESTRUCTION. If the premises are destroyed or damaged such that the
cost of repair exceeds fifty (50) percent of the value of the structure
before the damage, either party may elect to terminate the lease as of the
date of the damage or destruction by notice given to the other in writing not
more than forty-five (45) days following the date of damage. In such event
all rights and obligations of the parties shall cease as of the date of
termination, and Tenant shall be entitled to the reimbursement of any prepaid
amounts paid by Tenant and attributable to the anticipated term. If neither
party elects to terminate, Landlord shall proceed to restore the premises to
substantially the same form as prior to the damage or destruction up to, but
not to exceed, the amount of available insurance proceeds (less Landlord's
reasonable expenses to obtain such proceeds). Work shall be commenced as
soon as reasonably possible and thereafter shall proceed without interruption
except for work stoppages due to causes beyond the control of Landlord.
8.3 RENT ABATEMENT. Rent shall be abated during the repair of any damage
to the extent the premises are untenantable. Tenant shall have no claim
against Landlord for any inconvenience resulting from Landlord's activities
performed in conformance with the requirement of this section.
SECTION 9: EMINENT DOMAIN
9.1 PARTIAL TAKING. If a portion of the premises is condemned
and paragraph 9.2 does not apply the lease shall continue on the following
terms:
(a) Landlord shall be entitled to all of the proceeds
of condemnation, and Tenant shall have no claim
against Landlord as a result of the condemnation.
(b) Landlord shall proceed as soon as reasonably possible to
make such repairs and alterations to the premises as are necessary
to restore the remaining premises to a condition as comparable as
reasonably practicable to that existing at the time of the
condemnation up to, but not to exceed, the amount of the condemnation
award (less Landlord's
LAND SALE CONTRACT 20
<PAGE>
reasonable expenses to obtain such award). Work shall proceed without
interruption except for work stoppages due to causes beyond the
control of Landlord.
(c) After the date on which title vests in the
condemning authority or an earlier date on which
alterations or repairs are commenced by Landlord to
restore the balance of the premises in anticipation
of taking, the rent shall be reduced in proportion
to the reduction in value of the premises as an
economic unit on account of the partial taking. If
the parties are unable to agree upon the amount of
the reduction of rent, the amount shall be
determined by arbitration in the manner as is
provided in Section 17.
9.2 TOTAL TAKING. If a condemning authority takes all of the premises or
a portion sufficient to render the remaining premises reasonably unsuitable for
the use which Tenant was then making of the premises, as reasonably determined
by Landlord, the lease shall terminate as of the date the title vests in
the condemning authority. Such termination shall have the same effect as a
termination under paragraph 9.1(a) above.
9.3 SALE IN LIEU OF CONDEMNATION. Sale of all or part of the premises to
a purchaser with the power of eminent domain in the face of a threat or
probability of the exercise of the power shall be treated for the purposes of
this Section 9 as a taking by condemnation.
9.4 NOTICE OF ACTION. If either party receives notice of a condemnation
proceeding or a threat or probability thereof or of any action in lieu thereof,
such party shall promptly provide a copy of such notice to the other party.
SECTION 10: LIABILITY AND INDEMNITY
10.1 LIENS.
(a) Except with respect to activities for which Landlord may be
responsible, Tenant shall pay as due all claims for work done on and
for services rendered or material furnished to the premises and shall
keep the premises free from any liens. If Tenant fails to pay any
such claims or to discharge any lien, Landlord may do so and collect
the cost as additional rent. Any amount so added shall bear interest
at the rate of twelve percent (12%) per annum from the date expended
by Landlord and shall be payable on demand. Such action by Landlord
shall not constitute a waver of any right or
LAND SALE CONTRACT 21
<PAGE>
remedy which Landlord may have on account of Tenant's default.
(b) Tenant may withhold payment of any claim in
connection with a good-faith dispute over the
obligation to pay, so long as Landlord's property
interests are not jeopardized. If a lien is filed
as a result of nonpayment, Tenant shall, within ten
(10) days after knowledge of the filing, secure the
discharge of the lien or deposit with Landlord cash
or sufficient corporate surety bond or other surety
satisfactory to Landlord in an amount sufficient to
discharge the lien plus any costs, attorney fees,
and other charges that could accrue as a result of
a foreclosure or sale under the lien.
10.2 INDEMNIFICATION. Tenant shall indemnify and defend Landlord from
any claim, loss, or liability arising out of or related to any activity of
Tenant on the premises or any condition of the premises in the possession or
under the control of Tenant. Landlord shall have no liability to Tenant for any
loss or damage caused by third parties or by any condition of the premises.
10.3 LIABILITY INSURANCE. During the term of this lease Tenant
shall carry the following insurance at Tenant's cost with companies reasonably
acceptable to Landlord: public liability and property damage insurance in a
responsible company with limits of not less than $2,000,000 combined limit.
Such insurance shall cover all risks arising directly or indirectly out of
Tenant's activities on or any condition of the premises whether or not related
to an occurrence caused or contributed to by Landlord's negligence, shall
protect Tenant against the claims of Landlord on account of the obligations
assumed by Tenant under paragraph 10.2, and shall protect Landlord and Tenant
against claims of third persons. Certificates evidencing such insurance
and bearing endorsements requiring thirty (30) days' written notice to Landlord
prior to any change or cancellation shall be furnished to Landlord prior to
Tenant's occupancy of the premises. Landlord shall be named as an additional
insured on such policy or policies.
10.4 HAZARDOUS SUBSTANCES. Tenant shall not generate, release,
store, or deposit on the premises any environmentally hazardous or toxic
substances, materials, wastes, pollutants, oils, or contaminants, as defined by
any federal, state, or local law or regulation (collectively "Hazardous
Substances"), except those used in the normal course of Tenant's business
in commercially-reasonable amounts and in compliance with all applicable laws.
Tenant shall indemnify and hold harmless Landlord from and against any and all
claims, losses, damages, response costs and expenses of any nature whatsoever
arising out of or in any way related to the generation, release, storage, or
deposit of Hazardous Substances on the premises by Tenant or any other person or
entity other than
LAND SALE CONTRACT 22
<PAGE>
Landlord. Promptly upon written notice from Landlord or any governmental
entity, Tenant shall remove from the premises (including without
limitation the soil or water table thereof) all hazardous substances, and shall
restore the premises to a clean, safe, good, and serviceable condition. Any
such clean-up shall be in conformance with all applicable governmental
rules and regulations.
Notwithstanding the foregoing, Tenant shall have no liability for and
Landlord shall indemnify and hold harmless Tenant from and against any and all
claims, losses, damages, response costs and expenses of any nature whatsoever
arising out of or in any way related to the generation, release, storage,
or deposit of Hazardous Substances on the premises prior to the date of this
lease, unless caused by Tenant or its agents, employees or invitees.
SECTION 11: QUIET ENJOYMENT; MORTGAGE PRIORITY
11.1 LANDLORD'S WARRANTY. Landlord warrants that it is the contract vendee
of the premises and has the right to lease the same. Provided that Tenant is
not in default hereunder, Landlord will defend Tenant's right to quiet enjoyment
of the premises from the lawful claims of all persons during the lease term and
any renewals thereof.
11.2 MORTGAGE PRIORITY. This lease is and shall be prior to any mortgage
or deed of trust ("Encumbrance") recorded after the date of this lease and
affecting the premises. However, if any lender holding such an Encumbrance
requires that this lease be subordinate to the encumbrance, then Tenant agrees
that the lease shall be subordinate to the encumbrance if the holder thereof
agrees in writing with Tenant that so long as Tenant performs its obligations
under this lease, no foreclosure, deed given in lieu of foreclosure, or sale
pursuant to the terms of the Encumbrance, or other steps or procedures taken
under the Encumbrance shall affect Tenant's rights under this lease. If the
foregoing condition is met Tenant shall execute the written agreement and
any other documents reasonably required by the holder of the encumbrance to
accomplish the purposes of this paragraph. If the premises are sold as a result
of foreclosure of any encumbrance thereon, or otherwise transferred by Landlord
or any successor, Tenant shall attorn to the purchaser or transferee.
11.3 ESTOPPEL CERTIFICATE. Either party will within twenty (20) days after
notice from the other execute and deliver to the other party a certificate
stating whether or not this lease has been modified and is in full force and
effect and specifying any modifications or alleged breaches by the other
party. The certificate shall also state the amount of monthly base rent and
the dates to which rent has been paid in advance.
LAND SALE CONTRACT 23
<PAGE>
SECTION 12: ASSIGNMENT AND SUBLEASE
No part of the premises may be assigned, mortgaged, subleased, or otherwise
transferred, nor may a right of use of any portion of the premises be conferred
on any third person by any other means, whether voluntarily or by operation of
law, without the prior written consent of Landlord, which shall not be
unreasonably withheld or delayed. No consent in one instance shall prevent the
provision from applying to a subsequent issuance. Landlord's consent to any
assignment of subletting by Tenant shall not relieve Tenant of any obligations
to be performed by Tenant hereunder, whether occurring before or after such
assignment of subletting, unless Landlord grants to Tenant a release in writing.
SECTION 13: DEFAULT
13.1 DEFAULT IN RENT. Failure of Tenant to pay any rent or other charge
within ten (10) days after it is due.
13.2 DEFAULT IN OTHER COVENANTS. Failure of Tenant to comply with any term
or condition or fulfill any obligation of the lease (other than the payment of
rent or other charges) within twenty (20) days after written notice by Landlord
specifying the nature of the default with reasonable particularity. If the
default is of such a nature that it cannot be completely remedied within the
twenty (20) day period, this provision shall be complied with if Tenant begins
correction of the default within the 20-day period and thereafter proceeds with
reasonable diligence and in good faith to effect the remedy as soon as
practicable.
13.3 INSOLVENCY. Insolvency of Tenant; an assignment by Tenant for
the benefit of creditors; the filing by Tenant of a voluntary petition in
bankruptcy; an adjudication that Tenant is bankrupt or the appointment of a
receiver of the properties of Tenant; the filing of any involuntary petition of
bankruptcy and failure of Tenant to secure a dismissal of the petition within
forty-five (45) days after filing; attachment of or the levying of execution on
the leasehold interest and failure of Tenant to secure discharge of the
attachment or release of the levy of execution within ten (10) days.
13.4 ABANDONMENT: Failure of Tenant for five (5) days or more to occupy
the premises for the purposes permitted under this lease unless such failure is
excused under other provisions of this lease.
SECTION 14: REMEDIES ON DEFAULT
14.1 TERMINATION. In the event of a default the lease may be terminated at
the option of Landlord by notice in writing to Tenant. If the lease is not
terminated by election of Landlord or otherwise, Landlord shall be entitled to
recover damages from
LAND SALE CONTRACT 24
<PAGE>
Tenant for the default. If the lease is terminated, Tenant's liability to
Landlord for damages shall survive such termination, and Landlord may reenter,
take possession of the premises, and remove any persons or property under
any rights or remedies provided by law.
14.2 RELETTING. Following reentry or abandonment, Landlord may relet the
premises and in that connection may make any suitable alterations or refurbish
the premises, or both, or change the character or use of the premises, but
Landlord shall not be required to relet for any use or purpose other than
that specified in the lease or which Landlord may reasonably consider injurious
to the premises, or to any tenant which Landlord may reasonably consider
objectionable. Landlord may relet all or part of the premises, alone or in
conjunction with other properties, for a term longer or shorter than the term of
this lease, upon any reasonable terms and conditions, including the granting of
some rent-free occupancy or other rent concession.
14.3 DAMAGES. In the event of termination on default Landlord shall be
entitled to recover immediately, without waiting until the due date of any
future rent or until the date fixed for expiration of the lease term, the
following amounts as damages:
(a) The loss of reasonable rental value from the date
of default until a new tenant has been, or with the
exercise of reasonable efforts could have been,
secured.
(b) The reasonable costs of reentry and reletting
including without limitation the cost of any clean
up, refurbishing, removal of Tenant's property and
fixtures, or any other expense occasioned by
Tenant's failure to quit the premises upon
termination and to leave them in the required
condition, any remodeling costs, attorney fees,
court costs, broker commissions, and advertising
costs.
(c) Any excess of the value of the rent and all of
Tenant's other obligations under this lease over
the reasonable expected return from the premises
for the period commencing on the earlier of the
date of trial or the date the premises are relet
and continuing through the end of the term. The
present value of future amounts will be computed
using a discount rate equal to the prime loan rate
of United States National Bank of Oregon.
14.4 RIGHT TO SUE MORE THAN ONCE. Landlord may sue periodically
to recover damages during the period corresponding to
LAND SALE CONTRACT 25
<PAGE>
the remainder of the lease term, and no action for damages shall bar a later
action for damages subsequently accruing.
14.5 REMEDIES CUMULATIVE. The foregoing remedies shall be in addition to
and shall not exclude any other remedy available to Landlord under applicable
law.
SECTION 15: SURRENDER AT EXPIRATION
15.1 CONDITION OF PREMISES. Upon expiration of the lease term or earlier
termination on account of default, Tenant shall deliver all keys and surrender
possession of the premises in good condition and broom clean. Alterations
constructed by Tenant with permission from Landlord shall not be removed or
restored to the original condition unless the terms of permission for the
alteration so require.
15.2 FIXTURES
(a) All fixtures placed upon the premises during the
term, other than Tenant's trade fixtures, shall, at
Landlord's option, become the property of Landlord.
If Landlord so elects, Tenant shall remove any or
all fixtures which would otherwise remain the
property of Landlord, and shall repair any physical
damage resulting from the removal. If Tenant fails
to remove such fixtures, Landlord may do so and
charge the cost to Tenant with interest at the
legal rate from the date of expenditure.
(b) Prior to expiration or termination of the lease
term Tenant shall remove all furnishings,
furniture, and trade fixtures which remain its
property. If Tenant fails to do so, this shall be
an abandonment of the property, and Landlord may
retain the property and all rights of Tenant with
respect to it shall cease or, by notice in writing
given to Tenant within twenty (20) days after
removal was required, Landlord may elect to hold
Tenant to its obligation of removal. If Landlord
elects to require Tenant to remove, Landlord may
effect a removal and place the property in public
storage for Tenant's account. Tenant shall be
liable to Landlord for the cost of removal,
transportation to storage, and storage, with
interest at the legal rate on all such expenses
from the date of expenditure.
15.3 HOLDOVER:
(a) If Tenant does not vacate the premises at the time required,
Landlord shall have the option to treat
LAND SALE CONTRACT 26
<PAGE>
Tenant as a tenant from month to month, subject to all of the
provisions of this lease except the provisions for term and renewal,
and the provision for rent, which shall be equal to one hundred fifty
percent (150%) of the last rental payable under the lease. Failure
of Tenant to remove fixtures, furniture, furnishings, or trade
fixtures which Tenant is required to remove under this lease shall
constitute a failure to vacate to which this paragraph shall
apply if the property not removed will substantially interfere with
occupancy of the premises by another tenant or with occupancy by
Landlord for any purpose including preparation for a new tenant.
(b) If a month-to-month tenancy results from a holdover
by Tenant under this paragraph 15.3, the tenancy
shall be terminable at the end of any monthly
rental period on written notice from Landlord given
not less than ten (10) days prior to the
termination date which shall be specified in the
notice. Tenant waives any notice which would
otherwise be provided by law with respect to a
month-to-month tenancy.
SECTION 16: MISCELLANEOUS
16.1 TIME OF ESSENCE. Time is of the essence of the performance of
Tenant's obligations hereunder.
16.2 NONWAIVER. Waiver by either party of strict performance of any
provision of this lease shall not be a waiver of or prejudice the party's
right to require strict performance of the same provision in the future or of
any other provision.
16.3 ATTORNEYS' FEES. If suit or action is instituted in connection with
any controversy arising out of this lease, the prevailing party shall be
entitled to recover in addition to costs such sum as the court may adjudge
reasonable as attorney fees at trial or on any appeal or review.
16.4 NOTICES. Any notice required or permitted under this lease shall be
given when actually delivered or 48 hours after deposited in United States mail
as certified mail, return receipt requested, addressed to the address first
given in this lease or to such other address as may be specified from time to
time by either of the parties in writing.
16.5 SUCCESSION. Subject to the above-stated limitations on transfer of
Tenant's interest, this lease shall be binding upon and inure to the benefit of
the parties, their respective successors and assigns.
LAND SALE CONTRACT 27
<PAGE>
16.6 LANDLORD'S RIGHT TO CURE DEFAULTS. If Tenant fails to perform any
obligation under this lease, Landlord shall have the option to do so after ten
(10) days' written notice to Tenant. All of Landlord's expenditures to
correct the default shall be reimbursed by Tenant on demand with interest at
the rate of twelve percent (12%) per annum from the date of expenditure by
Landlord.
16.7 RECORDATION. This lease shall not be recorded without the consent in
writing of Landlord, which shall not be unreasonably withheld or delayed.
16.8 ENTRY FOR INSPECTION. Landlord shall have the right to enter upon the
premises at any reasonable time and after reasonable notice to determine
Tenant's compliance with this lease, and in addition shall have the right, at
any time during the last six (6) months of the term of this lease or any renewal
thereof, to place and maintain upon the premises notices for leasing of the
premises.
16.9 PRORATION OF RENT. In the event of commencement or termination of
this lease at a time other than the beginning or end of one of the specified
rental periods, then the rent shall be prorated as of the date of commencement
or termination and in the event of termination for reasons other than default,
all prepaid rent shall be refunded to Tenant or paid on its account.
SECTION 17. ARBITRATION
Landlord may at any time, and Tenant may at any time when not in default in
the payment of any amount due hereunder, request arbitration of any matter
in dispute. The party requesting arbitration shall do so by giving notice
to that effect to the other party, specifying in such notice the nature of the
dispute, and such dispute shall then be determined in the City of Portland, by
a single arbitrator, in accordance with the rules then pertaining to the
Arbitration Service of Portland, Inc. or the American Arbitration Association,
whichever organization is selected by the party initiating arbitration, except
to the extent provider otherwise under Oregon laws on arbitration and is
otherwise provided herein. In the event the parties cannot agree upon an
arbitrator, either party may petition the Presiding Judge of the Circuit Court
of Multnomah County, Oregon, to appoint the arbitrator. Any such appointed
arbitrator shall be a qualified expert with respect to the subject in dispute as
determined by the Presiding Judge. Each party shall submit its position to the
arbitrator and the arbitrator shall chose the position of one of the parties.
The award in such arbitration may be enforced on the application of either party
by the order of judgment of a court of competent jurisdiction. The fees and
expenses of any arbitration shall be borne by the losing party. The prevailing
party shall be entitled to recover from the losing party the expense of
its attorneys and experts as well as a reasonable amount for its own personnel
time incurred in connection with any arbitration.
LAND SALE CONTRACT 28
<PAGE>
IN WITNESS WHEREOF, the parties have executed this lease, in duplicate, on
the day and year first set forth above.
Landlord: HEALTHFIRST PROPERTIES, L.L.C.
By: Russell A. Dow, M.D.
----------------------------------------
Its: Manager
----------------------------------------
Tenant: HEALTHFIRST MEDICAL GROUP, P.C.
By: Matthew M. Shelly, M.D.
----------------------------------------
Its: President
----------------------------------------
LAND SALE CONTRACT 29
<PAGE>
EXHIBIT A
[Insert Legal Description]
LAND SALE CONTRACT 30
<PAGE>
EXHIBIT B
[Insert Maximum Yearly Rent]
LAND SALE CONTRACT 31
<PAGE>
EXHIBIT E
Senior Encumbrances
BROADWAY PROPERTY
- -----------------
LINE OF CREDIT DEED OF TRUST
Grantor : METROPOLITAN CLINIC, P.C.
Trustee : U.S. BANK OF WASHINGTON, N.A.
Beneficiary : UNITED STATES NATIONAL BANK OF OREGON
Amount : $1,900,000.00
Dated : December 22, 1995
Recorded : December 29, 1995
Fee No. : 95 162031
WESTSIDE PROPERTY
- -----------------
LINE OF CREDIT MORTGAGE/DEED OF TRUST AND SECURITY AGREEMENT
Grantor : METROPOLITAN CLINIC, P.C.
Trustee : CHICAGO TITLE INSURANCE COMPANY OF OREGON
Beneficiary : HARDING FLETCHER COMPANY (Construction Loan)
UNITED OF OMAHA LIFE INSURANCE COMPANY (Permanent Loan)
Amount : $1,800,000.00
Dated : December 12, 1989
Recorded : December 13, 1989
Fee No. : 89-60698
ASSIGNMENT OF LEASES AND RENTS
Assignor : METROPOLITAN CLINIC, P.C.
Assignee : HARDING FLETCHER COMPANY (Construction Loan)
UNITED OF OMAHA LIFE INSURANCE COMPANY (Permanent Loan)
Dated : December 12, 1989
Recorded : December 13, 1989
Fee No. : 89-60699
FINANCING STATEMENT
Debtor : METROPOLITAN CLINIC, P.C.
Secured Party : HARDING FLETCHER COMPANY
Recorded : December 13, 1989
Fee No. : 89-60700
Assigned to : UNITED OF OMAHA LIFE INSURANCE COMPANY
Recorded : July 19, 1990
Fee No. : 90-38273
Continued : December 9, 1994
Fee No. : 94110263
TUALATIN PROPERTY
- -----------------
LINE OF CREDIT DEED OF TRUST
Grantor : METROPOLITAN CLINIC, P.C.
Trustee : TICOR TITLE INSURANCE CO.
Beneficiary : UNITED STATES NATIONAL BANK OF OREGON
Amount : $3,750,000.00
Dated : June 15, 1995
Recorded : July 13, 1995
Fee No. : 95 048472
LAND SALE CONTRACT 32
<PAGE>
ASSIGNMENT OF RENTS
Assignor : METROPOLITAN CLINIC, P.C.
Assignee : UNITED STATES NATIONAL BANK OF OREGON
Dated : June 15, 1995
Recorded : July 13, 1995
Fee No. : 95 048473
LAND SALE CONTRACT 33
<PAGE>
EXHIBIT F
Permitted Title Exceptions
BROADWAY PROPERTY
GENERAL EXCEPTIONS:
1. Taxes or assessments which are not shown as existing liens by the records
of any taxing authority that levies taxes or assessments on real property or by
the public records, proceedings by a public agency which may result in taxes or
assessments, or notices of such proceedings whether or not shown by the records
of such agency or by the public records.
2. Any facts, rights, interests or claims which are not shown by the public
records but which could be ascertained by an inspection of said land or by
making inquiry of persons in possession thereof.
3. Easements, or claims of easement or encumbrances, not shown by the public
records, reservations or exceptions in patents or in acts authorizing the
issuance thereof, water rights, claims or title to water.
4. Discrepancies, conflicts in boundary lines, shortage in area,
encroachments, or any other facts which a correct survey would disclose.
5. Any lien, or right to a lien, for services, labor or material heretofore
or hereafter furnished, imposed by law and not shown by the public records.
SPECIFIC EXCEPTIONS:
6. PORTLAND city liens, if any. None as of date hereof.
7. Conditions and restrictions established by City of PORTLAND,
For : Variance for sign
Ordinance No. : VZ 19-66
Recorded : February 21, 1966
Book : 467 Page : 248
8. Conditions and restrictions established by City of PORTLAND,
For : Parking lot and sign
Ordinance No. : DA 26-65
Recorded : March 4, 1966
Book : 471 Page : 154
9. Conditions and restrictions established by City of PORTLAND,
For : Design review
Ordinance No. : DZ 9-71
Recorded : August 16, 1971
Book : 807 Page : 890
LAND SALE CONTRACT 34
<PAGE>
BROADWAY PROPERTY CONTINUED
10. Line of Credit Deed of Trust, including the terms and provisions thereof,
Grantor : METROPOLITAN CLINIC, P.C.
Trustee : U.S. BANK OF WASHINGTON, N.A.
Beneficiary : UNITED STATES NATIONAL BANK OF OREGON
Amount: : $1,900,000.00
Dated : December 22, 1995
Recorded : December 29, 1995
Fee No.: : 95 162031
11. Right, title and interest of METROPOLITAN CLINIC, P.C., as disclosed by Deed
of Trust, set forth next above.
12. Agreement, including the terms and provisions thereof,
For: : Lessee's equipment lease
Between: : RAINIERBANK LEASING, INC.,
METROPOLITAN CLINIC, P.C.,
a corporation, and METROPOLITAN
CLINIC BUILDING COMPANY
Recorded: : August 7, 1980
Book : 1460 Page : 1407
13. Right, title and interest of METROPOLITAN CLINIC BUILDING COMPANY, as
disclosed by Agreement, set forth next above.
14. Conditions and restrictions established by City of PORTLAND,
For : Design review
Ordinance No. : DZ 8-89
Recorded : March 13, 1989
Book : 2185 Page : 641
LAND SALE CONTRACT 35
<PAGE>
EXHIBIT F (continued)
Permitted Title Exceptions
WESTSIDE PROPERTY
GENERAL EXCEPTIONS:
1. Taxes or assessments which are not shown as existing liens by the records
of any taxing authority that levies taxes or assessments on real property or by
the public records, proceedings by a public agency which may result in taxes or
assessments, or notices of such proceedings whether or not shown by the records
of such agency or by the public records.
2. Any facts, rights, interests or claims which are not shown by the public
records but which could be ascertained by an inspection of said land or by
making inquiry of persons in possession thereof.
3. Easements, or claims of easement or encumbrances, not shown by the public
records, reservations or exceptions in patents or in acts authorizing the
issuance thereof, water rights, claims or title to water.
4. Discrepancies, conflicts in boundary lines, shortage in area,
encroachments, or any other facts which a correct survey would disclose.
5. Any lien, or right to a lien, for services, labor or material heretofore
or hereafter furnished, imposed by law and not shown by the public records.
SPECIFIC EXCEPTIONS:
6. The herein described premises are within and subject to the statutory
power of assessment of UNIFIED SEWERAGE AGENCY.
7. BEAVERTON city liens, if any. None as of date hereof.
8. Limited access as set forth in deed from WILLIAM WESTOFF, to the State of
Oregon, by and through its State Highway Commission, recorded August 1,
1942, in Book 210, Page 104, which provides that no right of easement or
right of access to, from or across the State Highway, other than expressly
provided for, shall attach to the abutting property.
Affects : Lot 9
Modified by instrument, including the terms and provisions thereof,
Recorded : October 9, 1961
Book : 451 Page : 4
LAND SALE CONTRACT 36
<PAGE>
WESTSIDE PROPERTY CONTINUED
9. Limited access as set forth in deed from EDWARD G. MOSHOFSKY, to the
State Of Oregon, by and through its State Highway Commission, recorded
September 12, 1942, in Book 211, Page 141, which provides that no right
of easement or right of access to, from or across the State Highway,
other than expressly provided for, shall attach to the abutting
property.
Affects : Lot 10
10. Covenants, conditions and restrictions as shown on the plat.
11. No vehicular access to N.W.Cornell Road from Lots 7, 8, 11 and 12 and
adjoining 50 feet along N.W. 167th Place as shown on the recorded plat.
12. Easement as shown on Plat.
For : Storm drain right of way:
Location : The Northerly lot line 10 feet in width
and the Easterly lot line 15 feet in
width
13. Easement as shown on Plat.
For : Utility
Location : Front lot lines 6 feet in width
14. Benefits, rights and duties including, but not limited to, use and
maintenance of undivided common ownership of Tract "E", as shown on the
recorded plat.
15. Conditions, restrictions, easements and setback lines, including the
terms and provisions thereof,
Recorded : February 22, 1980
Fee No. : 80006014
Affects : A portion of Lot 10
Restrictions herein, if any, based on race, color, religion, sex,
handicap, familial status or national origin are deleted.
16. Conditions and restrictions, including the terms and provisions thereof,
Recorded : August 17, 1984
Fee No. : 84032772
Affects : Lot 10
17. Restrictive Covenants to Waive Remonstrance, including the terms and
provisions thereof,
For : Sidewalks
Recorded : January 4, 1985
Fee No. : 85000452
18. Conditions, restrictions, easements and setback lines, including the
terms and provisions thereof,
Recorded : August 5, 1985
Fee No. : 85029794
LAND SALE CONTRACT 37
<PAGE>
WESTSIDE PROPERTY CONTINUED
Amended by instrument, including the terms and provisions thereof,
Recorded : September 20, 1989
Fee No. : 89-44783
Restrictions herein, if any, based on race, color, religion, sex,
handicap, familial status or national origin are deleted.
19. Restrictive Covenants to Waive Remonstrance, including the terms and
provisions thereof,
For : Storm drainage
Recorded : October 17, 1985
Fee No. : 85041550
20. Line of Credit Mortgage/Deed of Trust and Security Agreement,
including the terms and provisions thereof,
Grantor : METROPOLITAN CLINIC, P.C., an Oregon
professional corportion
Trustee : CHICAGO TITLE INSURANCE COMPANY OF OREGON
Beneficiary : HARDING FLETCHER COMPANY, an Oregon
corporation (Construction Loan) and
UNITED OF OMAHA LIFE INSURANCE
COMPANY, a Nebraska corporation
(Permanent Loan)
Amount : $1,800,000.00
Dated : December 12, 1989
Recorded : December 13, 1989
Fee No. : 89-60698
The beneficial interest of Harding Fletcher Company was assigned to
UNITED OF OMAHA LIFE INSURANCE COMPANY, a Nebraska corporation, by
document recorded July 19, 1990, as Fee No. 90-38272.
21. Assignment of Leases and Rents, including the terms and provisions
thereof, given as additional security for the Deed of Trust set forth
as Exception No. 20 above,
Assignor : METROPOLITAN CLINIC, P.C., an Oregon
professional corporation
Assignee : HARDING FLETCHER COMPANY, an Oregon
corporation, and its successors and
assigns, and UNITED OF OHAMA LIFE
INSURANCE COMPANY, a Nebraska
corporation
Dated : December 12, 1989
Recorded : December 13, 1989
Fee No. : 89-60699
22. Financing Statement, including the terms and provisions thereof,
Debtor : METROPOLITAN CLINIC, P.C.
Secured Party : HARDING FLETCHER COMPANY
Recorded : December 13, 1989
Fee No. : 89-60700
LAND SALE CONTRACT 38
<PAGE>
WESTSIDE PROPERTY CONTINUED
The above Financing Statement was assigned to UNITED OF OMAHA LIFE
INSURANCE COMPANY by instrument
Recorded : July 19, 1990
Fee No. : 90-38273
A notice of continuation of said Financing Statement was
Recorded : December 9, 1994
Fee No. : 94110263
LAND SALE CONTRACT 39
<PAGE>
EXHIBIT F (continued)
Permitted Title Exceptions
TUALATIN PROPERTY
GENERAL EXCEPTIONS:
1. Taxes or assessments which are not shown as existing liens by the records
of any taxing authority that levies taxes or assessments on real property or by
the public record, proceedings by a public agency which may result in taxes or
assessments, or notices of much proceedings whether or not shown by the records
of much agency or by the public records.
2. Any facts, rights, interests or claims which are not shown by the public
records but which could be ascertained by an inspection of said land or by
making inquiry of persons in possession thereof.
3. Easements, or claims of easement or encumbrances, not shown by the public
records, reservations or exceptions in patents or in acts authorizing the
issuance thereof, water rights, claims or title to water.
4. Discrepancies, conflicts in boundary lines, shortage in area,
encroachments, or any other facts which a correct survey would disclose.
5. Any lien, or right to a lien, for services, labor or material heretofore
or hereafter furnished, imposed by law and not shown by the public records.
SPECIFIC EXCEPTIONS:
6. The herein described premises are within and subject to the statutory
power of assessment of UNIFIED SEWERAGE AGENCY.
7. TUALATIN city liens, if any. None as of date hereof.
8. Easement, including the terms, rights and provisions thereof,
For : Right of way and incidents thereto
Granted to : PACIFIC TELEPHONE AND TELEGRAPH COMPANY
Recorded : January 31, 1913
Book : "D" Page : 100
9. Line of Credit Deed of Trust, including the terms and provisions thereof,
Grantor : METROPOLITAN CLINIC, P.C., an Oregon
corporation
Trustee : TICOR TITLE INSURANCE CO
Beneficiary : UNITED STATES NATIONAL BANK OF OREGON
Amount : $3,750,000.00
Dated : June 15, 1995
Recorded : July 13, 1995
Fee No. : 95048472
LAND SALE CONTRACT 40
<PAGE>
TUALATIN PROPERTY CONTINUED
10. Assignment of Rents including the terms and provisions thereof, given as
additional security for the Deed of Trust, set forth as Exception No.
9 above,
Assignor : METROPOLITAN CLINIC, P.C., a
corporation
Assignee : UNITED STATES NATIONAL BANK OF OREGON
Dated : June 15, 1995
Recorded : July 13, 1995
Fee No. : 95048473
11. Street Improvement Agreement, including the terms and provisions thereof,
Between : CITY OF TUALATIN, a municipal
corporation of Washington, and
CLACKAMAS COUNTIES, OREGON and
METROPOLITAN CLINIC P.C., a corporation
Recorded : July 13, 1995
Fee No. : 95048359
12. Easement, including the terms, rights and provisions thereof,
For : Permanent slope easement
Granted to : CITY OF TUALATIN, a political
subivision of the State of Oregon
Recorded : October 19, 1995
Fee No. : 95076175
Affects : The East line of Parcel III
LAND SALE CONRACT 41
<PAGE>
MEDICAL OFFICE LEASE
BETWEEN: HealthFirst Properties, L.L.C., whose address is 265 N. Broadway,
Portland, OR 97227
("Landlord");
AND: HealthFirst Medical Group, P.C. whose address is 265 N. Broadway,
Portland, OR 97227
("Tenant").
DATED AS OF: May 1, 1996
Landlord hereby leases to Tenant the real property legally described in the
attached Exhibit A, together with all improvements thereon, on the terms and
conditions stated below:
SECTION 1: OCCUPANCY
1.1 TERM. The term of this lease shall commence on the date of this
Agreement set forth above (the "Commencement Date") and shall expire on April
30, 2016, unless sooner terminated pursuant to the provisions hereof.
1.2 POSSESSION. Tenant's right to possession and obligations under the
lease shall commence on the Commencement Date.
SECTION 2: RENT
2.1 BASIC RENT. Beginning on the Commencement Date, Tenant shall pay
basic rent to Landlord of $22,312.50 per month. Rent shall be adjusted annually
based on the annual change in the Consumer Price Index for All Urban Consumers,
published by the Bureau of Labor Statistics of the United States Department of
Labor, for Portland-Vancouver (1977=100) or any other successor or substitute
index selected by Landlord, with a cumulative maximum yearly increase of three
percent (3%), such that the rent for any lease year shall not exceed the amount
set forth on the attached Exhibit B. At no time shall basic rent be less than
the basic rent for the previous lease year. Basic rent shall be payable on the
first day of each month in advance at such place as may be designated by
Landlord.
2.2 ADDITIONAL RENT. All taxes, insurance costs, utility charges, repairs
and maintenance and any other sum which Tenant is required to pay to Landlord or
third parties shall be additional rent.
2.3 LATE CHARGE. If any portion of the basic rent remains unpaid for ten
(10) or more calendar days after the date on which
1 - MEDICAL OFFICE LEASE
<PAGE>
such amount is due, Tenant shall pay to Landlord a late charge in an amount
equal to five percent (5%) of such delinquent payment. Tenant agrees that such
amount is a reasonable estimate of Landlord's collection and administrative
expenses.
SECTION 3. USE OF THE PREMISES
3.1 PERMITTED USE. The premises shall be used for medical office purposes
and uses related thereto, but for no other purpose without the prior written
consent of Landlord, which consent shall not be unreasonably withheld or
delayed.
3.2 RESTRICTIONS ON USE. In connection with its use of the premises,
Tenant shall, subject to Section 4.1:
(a) Conform to all applicable laws and regulations of any public
authority affecting the premises and correct at Tenant's own
expense any failure of compliance created through Tenant's fault
or by reason of Tenant's use.
(b) Refrain from any use which would be reasonably offensive to other
tenants or owners or users of neighboring premises or which would
tend to create a nuisance or damage the reputation of the
premises.
SECTION 4: REPAIRS AND MAINTENANCE
4.1 LANDLORD'S OBLIGATIONS. The premises are being leased in an "as is"
condition and Landlord shall not be liable for repairs or maintenance of the
premises or other charges, except for replacement and maintenance of the roof,
exterior walls (excluding painting), bearing walls, structural members and
foundation.
4.2 TENANT'S OBLIGATIONS. All repairs and maintenance to the premises not
otherwise the responsibility of Landlord pursuant to section 4.1 shall be the
responsibility of the Tenant including, but not limited to, the following:
(a) Repair of sidewalks, driveways, curbs and parking areas.
(b) Repair and maintenance of water, sewage, gas and
electrical services.
(c) Repair of the heating and air conditioning system, including
ordinary maintenance.
(d) Repair of interior walls, ceilings, doors and windows and related
hardware, light fixtures, switches, and wiring and plumbing.
2 - MEDICAL OFFICE LEASE
<PAGE>
(e) Maintain the exterior and interior of the premises in good
condition.
(f) Any repairs (including those for which Landlord would otherwise
be responsible pursuant to section 4.1) necessitated by the
negligence of Tenant, its agents, employees, and invitees.
(g) Any repairs or alterations required under Tenant's obligation to
comply with laws and regulations as set forth in 4.2(a) above.
4.3 REIMBURSEMENT FOR REPAIRS ASSUMED. If Tenant fails or refuses to make
repairs which are required by this Section 4, the Landlord may make the repairs
and charge the actual costs of repairs to Tenant. Such expenditures by Landlord
shall be reimbursed by Tenant on demand together with interest at the rate of
twelve percent (12%) per annum from the date of expenditure by Landlord. Except
in an emergency creating an immediate risk of personal injury or property
damage, Landlord shall not perform repairs which are the obligation of Tenant
and charge the Tenant for the resulting expense unless at least fifteen (15)
days before work is commenced Tenant is given notice in writing outlining with
reasonable particularity the repairs required, and Tenant fails within that time
to initiate such repairs in good faith.
4.4 INSPECTION OF PREMISES. Landlord shall have the right to inspect the
premises at any reasonable time after reasonable notice to Tenant, to determine
the necessity of repairs and/or maintenance.
SECTION 5: ALTERATIONS
5.1 ALTERATIONS PROHIBITED. Tenant shall make no improvements or
alterations on the premises of any kind without first obtaining Landlord's
written consent, which consent shall not be unreasonably withheld or delayed.
5.2 OWNERSHIP OF ALTERATIONS. All improvements and alterations performed
on the premises by either Landlord or Tenant shall be the property of Landlord
when installed unless the applicable Landlord's consent provides otherwise.
SECTION 6: FIRE INSURANCE
6.1 INSURANCE REQUIRED. Tenant shall keep the premises, including all
buildings, other improvements and landscape, insured at Tenant's expense against
fire and other risks covered by a standard fire insurance policy with an
endorsement for extended coverage. The policy shall be written for the full
insurable value, with loss payable to Landlord, and the policy or a certificate
of insurance shall be delivered to Landlord and shall
3 - MEDICAL OFFICE LEASE
<PAGE>
contain a stipulation providing that coverage will not be canceled or diminished
without a minimum of thirty (30) days written notice to Landlord. Tenant shall
bear the expense of any insurance insuring the property of Tenant on the
premises.
6.2 WAIVER OF SUBROGATION. So long as Tenant maintains the insurance
required by section 6.1, Tenant shall not be liable to Landlord and Landlord
shall in no event be liable to Tenant for any loss or damage caused by fire or
any of the risks enumerated in a standard fire insurance policy with an extended
coverage endorsement, and in the event of insured loss neither party's insurance
company shall have a subrogated claim against the other.
SECTION 7: TAXES AND UTILITIES
7.1 REAL PROPERTY TAXES. Tenant shall pay all real property taxes levied
against the premises within ten (10) days after receipt of notice from Landlord
of the total amount of the tax due.
7.2 PERSONAL PROPERTY TAXES. Tenant shall pay as due all taxes on its
personal property located on the premises.
7.3 SPECIAL ASSESSMENTS. If an assessment for a public improvement is
made against the premises, the assessment shall be paid by Tenant, who may elect
to cause such assessment to be paid in any legally-permitted installments.
Tenant shall only be obligated to pay such installments arising during the term
of this lease.
7.4 CONTEST OF TAXES. Tenant shall be permitted to contest the amount of
any tax so long as such contest is conducted in a manner which does not cause
any risk that Landlord's interest in the leased premises will be foreclosed for
nonpayment. Landlord, at no cost to Landlord, shall cooperate in any reasonable
manner with such contest by Tenant.
7.5 PRORATION OF TAXES. Tenant's share of real property taxes for the
year in which this lease commences or terminates shall be prorated based upon
the portion of the tax year that this lease is in effect.
7.6 UTILITY CHARGES. Tenant shall pay when due all charges for
electricity, gas, water, sanitary and storm sewage, garbage removal, telephone
service and any other utilities of any kind furnished to the premises.
SECTION 8: DAMAGE AND DESTRUCTION
8.1 PARTIAL DAMAGE. If the premises are partly damaged and paragraph 8.2
below does not apply, the premises shall be repaired by Landlord to the
condition existing prior to the damage up to, but not to exceed, the amount of
available insurance proceeds (less
4 - MEDICAL OFFICE LEASE
<PAGE>
Landlord's reasonable expenses to obtain such proceeds). Repairs shall be
accomplished with all reasonable dispatch subject to interruptions and delays
from matters beyond the control of Landlord. All repairs shall be done by
Landlord in such a way as to interfere as little as reasonably possible with the
use of the premises by Tenant.
8.2 DESTRUCTION. If the premises are destroyed or damaged such that the
cost of repair exceeds fifty (50) percent of the value of the structure before
the damage, either party may elect to terminate the lease as of the date of the
damage or destruction by notice given to the other in writing not more than
forty-five (45) days following the date of damage. In such event all rights and
obligations of the parties shall cease as of the date of termination, and Tenant
shall be entitled to the reimbursement of any prepaid amounts paid by Tenant and
attributable to the anticipated term. If neither party elects to terminate,
Landlord shall proceed to restore the premises to substantially the same form as
prior to the damage or destruction up to, but not to exceed, the amount of
available insurance proceeds (less Landlord's reasonable expenses to obtain such
proceeds). Work shall be commenced as soon as reasonably possible and thereafter
shall proceed without interruption except for work stoppages due to causes
beyond the control of Landlord.
8.3 RENT ABATEMENT. Rent shall be abated during the repair of any damage
to the extent the premises are untenantable. Tenant shall have no claim against
Landlord for any inconvenience resulting from Landlord's activities performed in
conformance with the requirement of this section.
SECTION 9: EMINENT DOMAIN
9.1 PARTIAL TAKING. If a portion of the premises is condemned and
paragraph 9.2 does not apply the lease shall continue on the following terms:
(a) Landlord shall be entitled to all of the proceeds of
condemnation, and Tenant shall have no claim against Landlord as
a result of the condemnation.
(b) Landlord shall proceed as soon as reasonably possible to make
such repairs and alterations to the premises as are necessary to
restore the remaining premises to a condition as comparable as
reasonably practicable to that existing at the time of the
condemnation up to, but not to exceed, the amount of the
condemnation award (less Landlord's reasonable expenses to obtain
such award). Work shall proceed without interruption except for
work stoppages due to causes beyond the control of Landlord.
5 - MEDICAL OFFICE LEASE
<PAGE>
(c) After the date on which title vests in the condemning authority
or an earlier date on which alterations or repairs are commenced
by Landlord to restore the balance of the premises in
anticipation of taking, the rent shall be reduced in proportion
to the reduction in value of the premises as an economic unit on
account of the partial taking. If the parties are unable to agree
upon the amount of the reduction of rent, the amount shall be
determined by arbitration in the manner as is provided in Section
17.
9.2 TOTAL TAKING. If a condemning authority takes all of the premises or
a portion sufficient to render the remaining premises reasonably unsuitable for
the use which Tenant was then making of the premises, as reasonably determined
by Landlord, the lease shall terminate as of the date the title vests in the
condemning authority. Such termination shall have the same effect as a
termination under paragraph 9.1(a) above.
9.3 SALE IN LIEU OF CONDEMNATION. Sale of all or part of the premises to
a purchaser with the power of eminent domain in the face of a threat or
probability of the exercise of the power shall be treated for the purposes of
this Section 9 as a taking by condemnation.
9.4 NOTICE OF ACTION. If either party receives notice of a condemnation
proceeding or a threat or probability thereof or of any action in lieu thereof,
such party shall promptly provide a copy of such notice to the other party.
SECTION 10: LIABILITY AND INDEMNITY
10.1 LIENS.
(a) Except with respect to activities for which Landlord may be
responsible, Tenant shall pay as due all claims for work done on
and for services rendered or material furnished to the premises
and shall keep the premises free from any liens. If Tenant fails
to pay any such claims or to discharge any lien, Landlord may do
so and collect the cost as additional rent. Any amount so added
shall bear interest at the rate of twelve percent (12%) per annum
from the date expended by Landlord and shall be payable on
demand. Such action by Landlord shall not constitute a waiver of
any right or remedy which Landlord may have on account of
Tenant's default.
(b) Tenant may withhold payment of any claim in connection with a
good-faith dispute over the
6 - MEDICAL OFFICE LEASE
<PAGE>
obligation to pay, so long as Landlord's property interests are
not jeopardized. If a lien is filed as a result of nonpayment,
Tenant shall, within ten (10) days after knowledge of the filing,
secure the discharge of the lien or deposit with Landlord cash or
sufficient corporate surety bond or other surety satisfactory to
Landlord in an amount sufficient to discharge the lien plus any
costs, attorney fees, and other charges that could accrue as a
result of a foreclosure or sale under the lien.
10.2 INDEMNIFICATION. Tenant shall indemnify and defend Landlord from any
claim, loss, or liability arising out of or related to any activity of Tenant on
the premises or any condition of the premises in the possession or under the
control of Tenant. Landlord shall have no liability to Tenant for any loss or
damage caused by third parties or by any condition of the premises.
10.3 LIABILITY INSURANCE. During the term of this lease Tenant shall
carry the following insurance at Tenant's cost with companies reasonably
acceptable to Landlord: public liability and property damage insurance in a
responsible company with limits of not less than $2,000,000 combined limit. Such
insurance shall cover all risks arising directly or indirectly out of Tenant's
activities on or any condition of the premises whether or not related to an
occurrence caused or contributed to by Landlord's negligence, shall protect
Tenant against the claims of Landlord on account of the obligations assumed by
Tenant under paragraph 10.2, and shall protect Landlord and Tenant against
claims of third persons. Certificates evidencing such insurance and bearing
endorsements requiring thirty (30) days' written notice to Landlord prior to any
change or cancellation shall be furnished to Landlord prior to Tenant's
occupancy of the premises. Landlord shall be named as an additional insured on
such policy or policies.
10.4 HAZARDOUS SUBSTANCES. Tenant shall not generate, release, store, or
deposit on the premises any environmentally hazardous or toxic substances,
materials, wastes, pollutants, oils, or contaminants, as defined by any federal,
state, or local law or regulation (collectively "Hazardous Substances"), except
those used in the normal course of Tenant's business in commercially-reasonable
amounts and in compliance with all applicable laws. Tenant shall indemnify and
hold harmless Landlord from and against any and all claims, losses, damages,
response costs and expenses of any nature whatsoever arising out of or in any
way related to the generation, release, storage, or deposit of Hazardous
Substances on the premises by Tenant or any other person or entity other than
Landlord. Promptly upon written notice from Landlord or any governmental entity,
Tenant shall remove from the premises (including without limitation the soil or
water table thereof) all hazardous substances, and shall restore the premises to
a clean,
7 - MEDICAL OFFICE LEASE
<PAGE>
safe, good, and serviceable condition. Any such clean-up shall be in conformance
with all applicable governmental rules and regulations.
Notwithstanding the foregoing, Tenant shall have no liability for and
Landlord shall indemnify and hold harmless Tenant from and against any and all
claims, losses, damages, response costs and expenses of any nature whatsoever
arising out of or in any way related to the generation, release, storage, or
deposit of Hazardous Substances on the premises prior to the date of this lease,
unless caused by Tenant or its agents, employees or invitees.
SECTION 11: QUIET ENJOYMENT; MORTGAGE PRIORITY
11.1 LANDLORD'S WARRANTY. Landlord warrants that it is the contract
vendee of the premises and has the right to lease the same. Provided that Tenant
is not in default hereunder, Landlord will defend Tenant's right to quiet
enjoyment of the premises from the lawful claims of all persons during the lease
term and any renewals thereof.
11.2 MORTGAGE PRIORITY. This lease is and shall be prior to any mortgage
or deed of trust ("Encumbrance") recorded after the date of this lease and
affecting the premises. However, if any lender holding such an Encumbrance
requires that this lease be subordinate to the encumbrance, then Tenant agrees
that the lease shall be subordinate to the encumbrance if the holder thereof
agrees in writing with Tenant that so long as Tenant performs its obligations
under this lease, no foreclosure, deed given in lieu of foreclosure, or sale
pursuant to the terms of the Encumbrance, or other steps or procedures taken
under the Encumbrance shall affect Tenant's rights under this lease. If the
foregoing condition is met Tenant shall execute the written agreement and any
other documents reasonably required by the holder of the encumbrance to
accomplish the purposes of this paragraph. If the premises are sold as a result
of foreclosure of any encumbrance thereon, or otherwise transferred by Landlord
or any successor, Tenant shall attorn to the purchaser or transferee.
11.3 ESTOPPEL CERTIFICATE. Either party will within twenty (20) days
after notice from the other execute and deliver to the other party a certificate
stating whether or not this lease has been modified and is in full force and
effect and specifying any modifications or alleged breaches by the other party.
The certificate shall also state the amount of monthly base rent and the dates
to which rent has been paid in advance.
SECTION 12: ASSIGNMENT AND SUBLEASE
No part of the premises may be assigned, mortgaged, subleased, or otherwise
transferred, nor may a right of use of any portion of
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<PAGE>
the premises be conferred on any third person by any other means, whether
voluntarily or by operation of law, without the prior written consent of
Landlord, which shall not be unreasonably withheld or delayed. No consent in one
instance shall prevent the provision from applying to a subsequent issuance.
Landlord's consent to any assignment of subletting by Tenant shall not relieve
Tenant of any obligations to be performed by Tenant hereunder, whether occurring
before or after such assignment of subletting, unless Landlord grants to Tenant
a release in writing.
SECTION 13: DEFAULT
13.1 DEFAULT IN RENT. Failure of Tenant to pay any rent or other charge
within ten (10) days after it is due.
13.2 DEFAULT IN OTHER COVENANTS. Failure of Tenant to comply with any
term or condition or fulfill any obligation of the lease (other than the payment
of rent or other charges) within twenty (20) days after written notice by
Landlord specifying the nature of the default with reasonable particularity. If
the default is of such a nature that it cannot be completely remedied within the
20-day period, this provision shall be complied with if Tenant begins correction
of the default within the 20-day period and thereafter proceeds with reasonable
diligence and in good faith to effect the remedy as soon as practicable.
13.3 INSOLVENCY. Insolvency of Tenant; an assignment by Tenant for the
benefit of creditors; the filing by Tenant of a voluntary petition in
bankruptcy; an adjudication that Tenant is bankrupt or the appointment of a
receiver of the properties of Tenant; the filing of any involuntary petition of
bankruptcy and failure of Tenant to secure a dismissal of the petition within
forty-five (45) days after filing; attachment of or the levying of execution on
the leasehold interest and failure of Tenant to secure discharge of the
attachment or release of the levy of execution within ten (10) days.
13.4 ABANDONMENT. Failure of Tenant for five (5) days or more to occupy
the premises for the purposes permitted under this lease unless such failure is
excused under other provisions of this lease.
SECTION 14: REMEDIES ON DEFAULT
14.1 TERMINATION. In the event of a default the lease may be terminated
at the option of Landlord by notice in writing to Tenant. If the lease is not
terminated by election of Landlord or otherwise, Landlord shall be entitled to
recover damages from Tenant for the default. If the lease is terminated,
Tenant's liability to Landlord for damages shall survive such termination, and
Landlord may reenter, take possession of the premises, and
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remove any persons or property under any rights or remedies provided by law.
14.2 RELETTING. Following reentry or abandonment, Landlord may relet the
premises and in that connection may make any suitable alterations or refurbish
the premises, or both, or change the character or use of the premises, but
Landlord shall not be required to relet for any use or purpose other than that
specified in the lease or which Landlord may reasonably consider injurious to
the premises, or to any tenant which Landlord may reasonably consider
objectionable. Landlord may relet all or part of the premises, alone or in
conjunction with other properties, for a term longer or shorter than the term of
this lease, upon any reasonable terms and conditions, includinq the granting of
some rent-free occupancy or other rent concession.
14.3 DAMAGES. In the event of termination on default Landlord shall be
entitled to recover immediately, without waiting until the due date of any
future rent or until the date fixed for expiration of the lease term, the
following amounts as damages:
(a) The loss of reasonable rental value from the date of default
until a new tenant has been, or with the exercise of reasonable
efforts could have been, secured.
(b) The reasonable costs of reentry and reletting including without
limitation the cost of any clean up, refurbishing, removal of
Tenant's property and fixtures, or any other expense occasioned
by Tenant's failure to quit the premises upon termination and to
leave them in the required condition, any remodeling costs,
attorney fees, court costs, broker commissions, and advertising
costs.
(c) Any excess of the value of the rent and all of Tenant's other
obligations under this lease over the reasonable expected return
from the premises for the period commencing on the earlier of the
date of trial or the date the premises are relet and continuing
through the end of the term. The present value of future amounts
will be computed using a discount rate equal to the prime loan
rate of United States National Bank of Oregon.
14.4 RIGHT TO SUE MORE THAN ONCE. Landlord may sue periodically to
recover damages during the period corresponding to the remainder of the lease
term, and no action for damages shall bar a later action for damages
subsequently accruing.
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<PAGE>
14.5 REMEDIES CUMULATIVE. The foregoing remedies shall be in addition to
and shall not exclude any other remedy available to Landlord under applicable
law.
SECTION 15: SURRENDER AT EXPIRATION
15.1 CONDITION OF PREMISES. Upon expiration of the lease term or earlier
termination on account of default, Tenant shall deliver all keys and surrender
possession of the premises in good condition and broom clean. Alterations
constructed by Tenant with permission from Landlord shall not be removed or
restored to the original condition unless the terms of permission for the
alteration so require.
15.2 FIXTURES.
(a) All fixtures placed upon the premises during the term, other than
Tenant's trade fixtures, shall, at Landlord's option, become the
property of Landlord. If Landlord so elects, Tenant shall remove
any or all fixtures which would otherwise remain the property of
Landlord, and shall repair any physical damage resulting from the
removal. If Tenant fails to remove such fixtures, Landlord may do
so and charge the cost to Tenant with interest at the legal rate
from the date of expenditure.
(b) Prior to expiration or termination of the lease term Tenant shall
remove all furnishings, furniture, and trade fixtures which
remain its property. If Tenant fails to do so, this shall be an
abandonment of the property, and Landlord may retain the property
and all rights of Tenant with respect to it shall cease or, by
notice in writing given to Tenant within twenty (20) days after
removal was required, Landlord may elect to hold Tenant to its
obligation of removal. If Landlord elects to require Tenant to
remove, Landlord may effect a removal and place the property in
public storage for Tenant's account. Tenant shall be liable to
Landlord for the cost of removal, transportation to storage, and
storage, with interest at the legal rate on all such expenses
from the date of expenditure.
15.3 HOLDOVER.
(a) If Tenant does not vacate the premises at the time required,
Landlord shall have the option to treat Tenant as a tenant from
month to month, subject to all of the provisions of this lease
except the
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<PAGE>
provisions for term and renewal, and the provision for rent,
which shall be equal to one hundred fifty percent (150%) of the
last rental payable under the lease. Failure of Tenant to remove
fixtures, furniture, furnishings, or trade fixtures which Tenant
is required to remove under this lease shall constitute a failure
to vacate to which this paragraph shall apply if the property not
removed will substantially interfere with occupancy of the
premises by another tenant or with occupancy by Landlord for any
purpose including preparation for a new tenant.
(b) If a month-to-month tenancy results from a holdover by Tenant
under this paragraph 15.3, the tenancy shall be terminable at the
end of any monthly rental period on written notice from Landlord
given not less than ten (10) days prior to the termination date
which shall be specified in the notice. Tenant waives any notice
which would otherwise be provided by law with respect to a
month-to-month tenancy.
SECTION 16: MISCELLANEOUS
16.1 TIME OF ESSENCE. Time is of the essence of the performance of
Tenant's obligations hereunder.
16.2 NONWAIVER. Waiver by either party of strict performance of any
provision of this lease shall not be a waiver of or prejudice the party's right
to require strict performance of the same provision in the future or of any
other provision.
16.3 ATTORNEYS' FEES. If suit or action is instituted in connection with
any controversy arising out of this lease, the prevailing party shall be
entitled to recover in addition to costs such sum as the court may adjudge
reasonable as attorney fees at trial or on any appeal or review.
16.4 NOTICES. Any notice required or permitted under this lease shall be
given when actually delivered or 48 hours after deposited in United States mail
as certified mail, return receipt requested, addressed to the address first
given in this lease or to such other address as may be specified from time to
time by either of the parties in writing.
16.5 SUCCESSION. Subject to the above-stated limitations on transfer of
Tenant's interest, this lease shall be binding upon and inure to the benefit of
the parties, their respective successors and assigns.
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<PAGE>
16.6 LANDLORD'S RIGHT TO CURE DEFAULTS. If Tenant fails to perform any
obligation under this lease, Landlord shall have the option to do so after ten
(10) days' written notice to Tenant. All of Landlord's expenditures to correct
the default shall be reimbursed by Tenant on demand with interest at the rate of
twelve percent (12%) per annum from the date of expenditure by Landlord.
16.7 RECORDATION. This lease shall not be recorded without the consent in
writing of Landlord, which shall not be unreasonably withheld or delayed.
16.8 ENTRY FOR INSPECTION. Landlord shall have the right to enter upon
the premises at any reasonable time and after reasonable notice to determine
Tenant's compliance with this lease, and in addition shall have the right, at
any time during the last six (6) months of the term of this lease or any renewal
thereof, to place and maintain upon the premises notices for leasing of the
premises.
16.9 PRORATION OF RENT. In the event of commencement or termination of
this lease at a time other than the beginning or end of one of the specified
rental periods, then the rent shall be prorated as of the date of commencement
or termination and in the event of termination for reasons other than default,
all prepaid rent shall be refunded to Tenant or paid on its account.
SECTION 17. ARBITRATION
Landlord may at any time, and Tenant may at any time when not in default in
the payment of any amount due hereunder, request arbitration of any matter in
dispute. The party requesting arbitration shall do so by giving notice to that
effect to the other party, specifying in such notice the nature of the dispute,
and such dispute shall then be determined in the City of Portland, by a single
arbitrator, in accordance with the rules then pertaining to the Arbitration
Service of Portland, Inc. or the American Arbitration Association, whichever
organization is selected by the party initiating arbitration, except to the
extent provider otherwise under Oregon laws on arbitration and is otherwise
provided herein. In the event the parties cannot agree upon an arbitrator,
either party may petition the Presiding Judge of the Circuit Court of Multnomah
County, Oregon, to appoint the arbitrator. Any such appointed arbitrator shall
be a qualified expert with respect to the subject in dispute as determined by
the Presiding Judge. Each party shall submit its position to the arbitrator and
the arbitrator shall chose the position of one of the parties. The award in such
arbitration may be enforced on the application of either party by the order of
judgment of a court of competent jurisdiction. The fees and expenses of any
arbitration shall be borne by the losing party. The prevailing party shall be
entitled to recover from the losing party the expense of its attorneys and
experts as well as a reasonable amount for its own personnel time incurred in
connection with any arbitration.
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IN WITNESS WHEREOF, the parties have executed this lease, in duplicate, on
the day and year first set forth above.
Landlord: HEALTHFIRST PROPERTIES, L.L.C.
By: /s/ Russell A Dow, M.D.
-----------------------------------
Its: Manager
Tenant: HEALTHFIRST MEDICAL GROUP P.C.
By: /s/ Matthew M. Shelley, M.D.
-----------------------------------
Its: President
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<PAGE>
EXHIBIT A
Broadway Property
Lots 1 through 12, Block 17, ELIZABETH IRVING'S ADDITION TO EAST PORTLAND, in
the City of Portland, County of Multnomah and State of Oregon.
EXCEPTING THEREFROM all that portion of Lots 6 and 7 annexed by said City of
Portland for widening of North Broadway.
<PAGE>
EXHIBIT B
Broadway Property
Maximum Yearly Rent
3%
YEAR RENT
- ---- ----
1996 267,750
1997 275,783
1998 284,056
1999 292,578
2000 301,355
2001 310,396
2002 319,708
2003 329,299
2004 339,178
2005 349,353
2006 359,834
2007 370,629
2008 381,747
2009 393,200
2010 404,996
2011 417,146
2012 429,660
2013 442,550
2014 455,826
2015 469,501
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MEDICAL OFFICE LEASE
BETWEEN: HealthFirst Properties, L.L.C., whose address is 265 N.
Broadway, Portland, OR 97227
("Landlord");
AND: HealthFirst Medical Group, P.C. whose address is 265 N.
Broadway, Portland, OR 97227
("Tenant").
DATED AS OF: May 1, 1996
Landlord hereby leases to Tenant the real property legally described in the
attached Exhibit A, together with all improvements thereon, on the terms and
conditions stated below:
SECTION 1: OCCUPANCY
1.1 TERM. The term of this lease shall commence on the date of this
Agreement set forth above (the "Commencement Date") and shall expire on April
30, 2016, unless sooner terminated pursuant to the provisions hereof.
1.2 POSSESSION. Tenant's right to possession and obligations under the
lease shall commence on the Commencement Date.
SECTION 2: RENT
2.1 BASIC RENT. Beginning on the Commencement Date, Tenant shall pay basic
rent to Landlord of $56,437.50 per month. Rent shall be adjusted annually based
on the annual change in the Consumer Price Index for All Urban Consumers,
published by the Bureau of Labor Statistics of the United States Department of
Labor, for Portland-Vancouver (1977=100) or any other successor or substitute
index selected by Landlord, with a cumulative maximum yearly increase of three
percent (3%), such that the rent for any lease year shall not exceed the amount
set forth on the attached Exhibit B. At no time shall basic rent be less than
the basic rent for the previous lease year. Basic rent shall be payable on the
first day of each month in advance at such place as may be designated by
Landlord.
2.2 ADDITIONAL RENT. All taxes, insurance costs, utility charges, repairs
and maintenance and any other sum which Tenant is required to pay to Landlord or
third parties shall be additional rent.
2.3 LATE CHARGE. If any portion of the basic rent remains unpaid for ten
(10) or more calendar days after the date on which
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- -
such amount is due, Tenant shall pay to Landlord a late charge in an amount
equal to five percent (5%) of such delinquent payment. Tenant agrees that such
amount is a reasonable estimate of Landlord's collection and administrative
expenses.
SECTION 3. USE OF THE PREMISES
3.1 PERMITTED USE. The premises shall be used for medical office purposes
and uses related thereto, but for no other purpose without the prior written
consent of Landlord, which consent shall not be unreasonably withheld or
delayed.
3.2 RESTRICTIONS ON USE. In connection with its use of the premises,
Tenant shall, subject to Section 4.1:
(a) Conform to all applicable laws and regulations of any public
authority affecting the premises and correct at Tenant's own
expense any failure of compliance created through Tenant's fault
or by reason of Tenant's use.
(b) Refrain from any use which would be reasonably offensive to other
tenants or owners or users of neighboring premises or which would
tend to create a nuisance or damage the reputation of the
premises.
SECTION 4: REPAIRS AND MAINTENANCE
4.1 LANDLORD'S OBLIGATIONS. The premises are being leased in an "as is"
condition and Landlord shall not be liable for repairs or maintenance of the
premises or other charges, except for replacement and maintenance of the roof,
exterior walls (excluding painting), bearing walls, structural members and
foundation.
4.2 TENANT'S OBLIGATIONS. All repairs and maintenance to the premises not
otherwise the responsibility of Landlord pursuant to section 4.1 shall be the
responsibility of the Tenant including, but not limited to, the following:
(a) Repair of sidewalks, driveways, curbs and parking areas.
(b) Repair and maintenance of water, sewage, gas and
electrical services.
(c) Repair of the heating and air conditioning system, including
ordinary maintenance.
(d) Repair of interior walls, ceilings, doors and windows and related
hardware, light fixtures, switches, and wiring and plumbing.
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<PAGE>
(e) Maintain the exterior and interior of the premises in good
condition.
(f) Any repairs (including those for which Landlord would otherwise
be responsible pursuant to section 4.1) necessitated by the
negligence of Tenant, its agents, employees, and invitees.
(g) Any repairs or alterations required under Tenant's obligation to
comply with laws and regulations as set forth in 4.2(a) above.
4.3 REIMBURSEMENT FOR REPAIRS ASSUMED. If Tenant fails or refuses to make
repairs which are required by this Section 4, the Landlord may make the repairs
and charge the actual costs of repairs to Tenant. Such expenditures by Landlord
shall be reimbursed by Tenant on demand together with interest at the rate of
twelve percent (12%) per annum from the date of expenditure by Landlord. Except
in an emergency creating an immediate risk of personal injury or property
damage, Landlord shall not perform repairs which are the obligation of Tenant
and charge the Tenant for the resulting expense unless at least fifteen (15)
days before work is commenced Tenant is given notice in writing outlining with
reasonable particularity the repairs required, and Tenant fails within that time
to initiate such repairs in good faith.
4.4 INSPECTION OF PREMISES. Landlord shall have the right to inspect the
premises at any reasonable time after reasonable notice to Tenant, to determine
the necessity of repairs and/or maintenance.
SECTION 5: ALTERATIONS
5.1 ALTERATIONS PROHIBITED. Tenant shall make no improvements or
alterations on the premises of any kind without first obtaining Landlord's
written consent, which consent shall not be unreasonably withheld or delayed.
5.2 OWNERSHIP OF ALTERATIONS. All improvements and alterations performed
on the premises by either Landlord or Tenant shall be the property of Landlord
when installed unless the applicable Landlord's consent provides otherwise.
SECTION 6: FIRE INSURANCE
6.1 INSURANCE REQUIRED. Tenant shall keep the premises, including all
buildings, other improvements and landscape, insured at Tenant's expense against
fire and other risks covered by a standard fire insurance policy with an
endorsement for extended coverage. The policy shall be written for the full
insurable value, with loss payable to Landlord, and the policy or a certificate
of insurance shall be delivered to Landlord and shall
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<PAGE>
contain a stipulation providing that coverage will not be canceled or diminished
without a minimum of thirty (30) days written notice to Landlord. Tenant shall
bear the expense of any insurance insuring the property of Tenant on the
premises.
6.2 WAIVER OF SUBROGATION. So long as Tenant maintains the insurance
required by section 6.1, Tenant shall not be liable to Landlord and Landlord
shall in no event be liable to Tenant for any loss or damage caused by fire or
any of the risks enumerated in a standard fire insurance policy with an extended
coverage endorsement, and in the event of insured loss neither party's insurance
company shall have a subrogated claim against the other.
SECTION 7: TAXES AND UTILITIES
7.1 REAL PROPERTY TAXES. Tenant shall pay all real property taxes levied
against the premises within ten (10) days after receipt of notice from Landlord
of the total amount of the tax due.
7.2 PERSONAL PROPERTY TAXES. Tenant shall pay as due all taxes on its
personal property located on the premises.
7.3 SPECIAL ASSESSMENTS. If an assessment for a public improvement is made
against the premises, the assessment shall be paid by Tenant, who may elect to
cause such assessment to be paid in any legally-permitted installments. Tenant
shall only be obligated to pay such installments arising during the term of this
lease.
7.4 CONTEST OF TAXES. Tenant shall be permitted to contest the amount of
any tax so long as such contest is conducted in a manner which does not cause
any risk that Landlord's interest in the leased premises will be foreclosed for
nonpayment. Landlord, at no cost to Landlord, shall cooperate in any reasonable
manner with such contest by Tenant.
7.5 PRORATION OF TAXES. Tenant's share of real property taxes for the year
in which this lease commences or terminates shall be prorated based upon the
portion of the tax year that this lease is in effect.
7.6 UTILITY CHARGES. Tenant shall pay when due all charges for
electricity, gas, water, sanitary and storm sewage, garbage removal, telephone
service and any other utilities of any kind furnished to the premises.
SECTION 8: DAMAGE AND DESTRUCTION
8.1 PARTIAL DAMAGE. If the premises are partly damaged and paragraph 8.2
below does not apply, the premises shall be repaired by Landlord to the
condition existing prior to the damage up to, but not to exceed, the amount of
available insurance proceeds (less
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<PAGE>
Landlord's reasonable expenses to obtain such proceeds). Repairs shall be
accomplished with all reasonable dispatch subject to interruptions and delays
from matters beyond the control of Landlord. All repairs shall be done by
Landlord in such a way as to interfere as little as reasonably possible with the
use of the premises by Tenant.
8.2 DESTRUCTION. If the premises are destroyed or damaged such that the
cost of repair exceeds fifty (50) percent of the value of the structure before
the damage, either party may elect to terminate the lease as of the date of the
damage or destruction by notice given to the other in writing not more than
forty-five (45) days following the date of damage. In such event all rights and
obligations of the parties shall cease as of the date of termination, and Tenant
shall be entitled to the reimbursement of any prepaid amounts paid by Tenant and
attributable to the anticipated term. If neither party elects to terminate,
Landlord shall proceed to restore the premises to substantially the same form as
prior to the damage or destruction up to, but not to exceed, the amount of
available insurance proceeds (less Landlord's reasonable expenses to obtain such
proceeds). Work shall be commenced as soon as reasonably possible and thereafter
shall proceed without interruption except for work stoppages due to causes
beyond the control of Landlord.
8.3 RENT ABATEMENT. Rent shall be abated during the repair of any damage
to the extent the premises are untenantable. Tenant shall have no claim against
Landlord for any inconvenience resulting from Landlord's activities performed in
conformance with the requirement of this section.
SECTION 9: EMINENT DOMAIN
9.1 PARTIAL TAKING. If a portion of the premises is condemned and
paragraph 9.2 does not apply the lease shall continue on the following terms:
(a) Landlord shall be entitled to all of the proceeds of
condemnation, and Tenant shall have no claim against Landlord as
a result of the condemnation.
(b) Landlord shall proceed as soon as reasonably possible to make
such repairs and alterations to the premises as are necessary to
restore the remaining premises to a condition as comparable as
reasonably practicable to that existing at the time of the
condemnation up to, but not to exceed, the amount of the
condemnation award (less Landlord's reasonable expenses to obtain
such award). Work shall proceed without interruption except for
work stoppages due to causes beyond the control of Landlord.
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<PAGE>
(c) After the date on which title vests in the condemning authority
or an earlier date on which alterations or repairs are commenced
by Landlord to restore the balance of the premises in
anticipation of taking, the rent shall be reduced in proportion
to the reduction in value of the premises as an economic unit on
account of the partial taking. If the parties are unable to agree
upon the amount of the reduction of rent, the amount shall be
determined by arbitration in the manner as is provided in Section
17.
9.2 TOTAL TAKING. If a condemning authority takes all of the premises or
a portion sufficient to render the remaining premises reasonably unsuitable for
the use which Tenant was then making of the premises, as reasonably determined
by Landlord, the lease shall terminate as of the date the title vests in the
condemning authority. Such termination shall have the same effect as a
termination under paragraph 9.1(a) above.
9.3 SALE IN LIEU OF CONDEMNATION. Sale of all or part of the premises to a
purchaser with the power of eminent domain in the face of a threat or
probability of the exercise of the power shall be treated for the purposes of
this Section 9 as a taking by condemnation.
9.4 NOTICE OF ACTION. If either party receives notice of a condemnation
proceeding or a threat or probability thereof or of any action in lieu thereof,
such party shall promptly provide a copy of such notice to the other party.
SECTION 10: LIABILITY AND INDEMNITY
10.1 LIENS.
(a) Except with respect to activities for which Landlord may be
responsible, Tenant shall pay as due all claims for work done on
and for services rendered or material furnished to the premises
and shall keep the premises free from any liens. If Tenant fails
to pay any such claims or to discharge any lien, Landlord may do
so and collect the cost as additional rent. Any amount so added
shall bear interest at the rate of twelve percent (12%) per annum
from the date expended by Landlord and shall be payable on
demand. Such action by Landlord shall not constitute a waiver of
any right or remedy which Landlord may have on account of
Tenant's default.
(b) Tenant may withhold payment of any claim in connection with a
good-faith dispute over the
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<PAGE>
obligation to pay, so long as Landlord's property interests are
not jeopardized. If a lien is filed as a result of nonpayment,
Tenant shall, within ten (10) days after knowledge of the filing,
secure the discharge of the lien or deposit with Landlord cash or
sufficient corporate surety bond or other surety satisfactory to
Landlord in an amount sufficient to discharge the lien plus any
costs, attorney fees, and other charges that could accrue as a
result of a foreclosure or sale under the lien.
10.2 INDEMNIFICATION. Tenant shall indemnify and defend Landlord from any
claim, loss, or liability arising out of or related to any activity of Tenant on
the premises or any condition of the premises in the possession or under the
control of Tenant. Landlord shall have no liability to Tenant for any loss or
damage caused by third parties or by any condition of the premises.
10.3 LIABILITY INSURANCE. During the term of this lease Tenant shall carry
the following insurance at Tenant's cost with companies reasonably acceptable to
Landlord: public liability and property damage insurance in a responsible
company with limits of not less than $2,000,000 combined limit. Such insurance
shall cover all risks arising directly or indirectly out of Tenant's activities
on or any condition of the premises whether or not related to an occurrence
caused or contributed to by Landlord's negligence, shall protect Tenant against
the claims of Landlord on account of the obligations assumed by Tenant under
paragraph 10.2, and shall protect Landlord and Tenant against claims of third
persons. Certificates evidencing such insurance and bearing endorsements
requiring thirty (30) days' written notice to Landlord prior to any change or
cancellation shall be furnished to Landlord prior to Tenant's occupancy of the
premises. Landlord shall be named as an additional insured on such policy or
policies.
10.4 HAZARDOUS SUBSTANCES. Tenant shall not generate, release, store, or
deposit on the premises any environmentally hazardous or toxic substances,
materials, wastes, pollutants, oils, or contaminants, as defined by any federal,
state, or local law or regulation (collectively "Hazardous Substances"), except
those used in the normal course of Tenant's business in commercially-reasonable
amounts and in compliance with all applicable laws. Tenant shall indemnify and
hold harmless Landlord from and against any and all claims, losses, damages,
response costs and expenses of any nature whatsoever arising out of or in any
way related to the generation, release, storage, or deposit of Hazardous
Substances on the premises by Tenant or any other person or entity other than
Landlord. Promptly upon written notice from Landlord or any governmental entity,
Tenant shall remove from the premises (including without limitation the soil or
water table thereof) all hazardous substances, and shall restore the premises to
a clean,
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<PAGE>
safe, good, and serviceable condition. Any such clean-up shall be in conformance
with all applicable governmental rules and regulations.
Notwithstanding the foregoing, Tenant shall have no liability for and
Landlord shall indemnify and hold harmless Tenant from and against any and all
claims, losses, damages, response costs and expenses of any nature whatsoever
arising out of or in any way related to the generation, release, storage, or
deposit of Hazardous Substances on the premises prior to the date of this lease,
unless caused by Tenant or its agents, employees or invitees.
SECTION 11: QUIET ENJOYMENT; MORTGAGE PRIORITY
11.1 LANDLORD'S WARRANTY. Landlord warrants that it is the contract vendee
of the premises and has the right to lease the same. Provided that Tenant is not
in default hereunder, Landlord will defend Tenant's right to quiet enjoyment of
the premises from the lawful claims of all persons during the lease term and any
renewals thereof.
11.2 MORTGAGE PRIORITY. This lease is and shall be prior to any mortgage or
deed of trust ("Encumbrance") recorded after the date of this lease and
affecting the premises. However, if any lender holding such an Encumbrance
requires that this lease be subordinate to the encumbrance, then Tenant agrees
that the lease shall be subordinate to the encumbrance if the holder thereof
agrees in writing with Tenant that so long as Tenant performs its obligations
under this lease, no foreclosure, deed given in lieu of foreclosure, or sale
pursuant to the terms of the Encumbrance, or other steps or procedures taken
under the Encumbrance shall affect Tenant's rights under this lease. If the
foregoing condition is met Tenant shall execute the written agreement and any
other documents reasonably required by the holder of the encumbrance to
accomplish the purposes of this paragraph. If the premises are sold as a result
of foreclosure of any encumbrance thereon, or otherwise transferred by Landlord
or any successor, Tenant shall attorn to the purchaser or transferee.
11.3 ESTOPPEL CERTIFICATE. Either party will within twenty (20) days after
notice from the other execute and deliver to the other party a certificate
stating whether or not this lease has been modified and is in full force and
effect and specifying any modifications or alleged breaches by the other party.
The certificate shall also state the amount of monthly base rent and the dates
to which rent has been paid in advance.
SECTION 12: ASSIGNMENT AND SUBLEASE
No part of the premises may be assigned, mortgaged, subleased, or otherwise
transferred, nor may a right of use of any portion of
8 - MEDICAL OFFICE LEASE
<PAGE>
the premises be conferred on any third person by any other means, whether
voluntarily or by operation of law, without the prior written consent of
Landlord, which shall not be unreasonably withheld or delayed. No consent in one
instance shall prevent the provision from applying to a subsequent issuance.
Landlord's consent to any assignment of subletting by Tenant shall not relieve
Tenant of any obligations to be performed by Tenant hereunder, whether occurring
before or after such assignment of subletting, unless Landlord grants to Tenant
a release in writing.
SECTION 13: DEFAULT
13.1 DEFAULT IN RENT. Failure of Tenant to pay any rent or other charge
within ten (10) days after it is due.
13.2 DEFAULT IN OTHER COVENANTS. Failure of Tenant to comply with any
term or condition or fulfill any obligation of the lease (other than the
payment of rent or other charges) within twenty (20) days after written
notice by Landlord specifying the nature of the default with reasonable
particularity. If the default is of such a nature that it cannot be
completely remedied within the 20-day period, this provision shall be
complied with if Tenant begins correction of the default within the 20-day
period and thereafter proceeds with reasonable diligence and in good faith to
effect the remedy as soon as practicable.
13.3 INSOLVENCY. Insolvency of Tenant; an assignment by Tenant for the
benefit of creditors; the filing by Tenant of a voluntary petition in
bankruptcy; an adjudication that Tenant is bankrupt or the appointment of a
receiver of the properties of Tenant; the filing of any involuntary petition of
bankruptcy and failure of Tenant to secure a dismissal of the petition within
forty-five (45) days after filing; attachment of or the levying of execution on
the leasehold interest and failure of Tenant to secure discharge of the
attachment or release of the levy of execution within ten (10) days.
13.4 ABANDONMENT: Failure of Tenant for five (5) days or more to occupy the
premises for the purposes permitted under this lease unless such failure is
excused under other provisions of this lease.
SECTION 14: REMEDIES ON DEFAULT
14.1 TERMINATION. In the event of a default the lease may be terminated at
the option of Landlord by notice in writing to Tenant. If the lease is not
terminated by election of Landlord or otherwise, Landlord shall be entitled to
recover damages from Tenant for the default. If the lease is terminated,
Tenant's liability to Landlord for damages shall survive such termination, and
Landlord may reenter, take possession of the premises, and
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remove any persons or property under any rights or remedies provided by law.
14.2 RELETTING. Following reentry or abandonment, Landlord may relet the
premises and in that connection may make any suitable alterations or refurbish
the premises, or both, or change the character or use of the premises, but
Landlord shall not be required to relet for any use or purpose other than that
specified in the lease or which Landlord may reasonably consider injurious to
the premises, or to any tenant which Landlord may reasonably consider
objectionable. Landlord may relet all or part of the premises, alone or in
conjunction with other properties, for a term longer or shorter than the term of
this lease, upon any reasonable terms and conditions, including the granting of
some rent-free occupancy or other rent concession.
14.3 DAMAGES. In the event of termination on default Landlord shall be
entitled to recover immediately, without waiting until the due date of any
future rent or until the date fixed for expiration of the lease term, the
following amounts as damages:
(a) The loss of reasonable rental value from the date of default
until a new tenant has been, or with the exercise of reasonable
efforts could have been, secured.
(b) The reasonable costs of reentry and reletting including without
limitation the cost of any clean up, refurbishing, removal of
Tenant's property and fixtures, or any other expense occasioned
by Tenant's failure to quit the premises upon termination and to
leave them in the required condition, any remodeling costs,
attorney fees, court costs, broker commissions, and advertising
costs.
(c) Any excess of the value of the rent and all of Tenant's other
obligations under this lease over the reasonable expected return
from the premises for the period commencing on the earlier of the
date of trial or the date the premises are relet and continuing
through the end of the term. The present value of future amounts
will be computed using a discount rate equal to the prime loan
rate of United States National Bank of Oregon.
14.4 RIGHT TO SUE MORE THAN ONCE. Landlord may sue periodically to recover
damages during the period corresponding to the remainder of the lease term, and
no action for damages shall bar a later action for damages subsequently
accruing.
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14.5 REMEDIES CUMULATIVE. The foregoing remedies shall be in addition to
and shall not exclude any other remedy available to Landlord under applicable
law.
SECTION 15: SURRENDER AT EXPIRATION
15.1 CONDITION OF PREMISES. Upon expiration of the lease term or earlier
termination on account of default, Tenant shall deliver all keys and surrender
possession of the premises in good condition and broom clean. Alterations
constructed by Tenant with permission from Landlord shall not be removed or
restored to the original condition unless the terms of permission for the
alteration so require.
15.2 FIXTURES
(a) All fixtures placed upon the premises during the term, other than
Tenant's trade fixtures, shall, at Landlord's option, become the
property of Landlord. If Landlord so elects, Tenant shall remove any
or all fixtures which would otherwise remain the property of Landlord,
and shall repair any physical damage resulting from the removal. If
Tenant fails to remove such fixtures, Landlord may do so and charge
the cost to Tenant with interest at the legal rate from the date of
expenditure.
(b) Prior to expiration or termination of the lease term Tenant shall
remove all furnishings, furniture, and trade fixtures which remain its
property. If Tenant fails to do so, this shall be an abandonment of
the property, and Landlord may retain the property and all rights of
Tenant with respect to it shall cease or, by notice in writing given
to Tenant within twenty (20) days after removal was required, Landlord
may elect to hold Tenant to its obligation of removal. If Landlord
elects to require Tenant to remove, Landlord may effect a removal and
place the property in public storage for Tenant's account. Tenant
shall be liable to Landlord for the cost of removal, transportation to
storage, and storage, with interest at the legal rate on all such
expenses from the date of expenditure.
15.3 HOLDOVER:
(a) If Tenant does not vacate the premises at the time required, Landlord
shall have the option to treat Tenant as a tenant from month to month,
subject to all of the provisions of this lease except the
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<PAGE>
provisions for term and renewal, and the provision for rent, which
shall be equal to one hundred fifty percent (150%) of the last rental
payable under the lease. Failure of Tenant to remove fixtures,
furniture, furnishings, or trade fixtures which Tenant is required to
remove under this lease shall constitute a failure to vacate to which
this paragraph shall apply if the property not removed will
substantially interfere with occupancy of the premises by another
tenant or with occupancy by Landlord for any purpose including
preparation for a new tenant.
(b) If a month-to-month tenancy results from a holdover by Tenant under
this paragraph 15.3, the tenancy shall be terminable at the end of
any monthly rental period on written notice from Landlord given not
less than ten (10) days prior to the termination date which shall be
specified in the notice. Tenant waives any notice which would
otherwise be provided by law with respect to a month-to-month tenancy.
SECTION 16: MISCELLANEOUS
16.1 TIME OF ESSENCE. Time is of the essence of the performance of Tenant's
obligations hereunder.
16.2 NONWAIVER. Waiver by either party of strict performance of any
provision of this lease shall not be a waiver of or prejudice the party's right
to require strict performance of the same provision in the future or of any
other provision.
16.3 ATTORNEYS' FEES. If suit or action is instituted in connection with
any controversy arising out of this lease, the prevailing party shall be
entitled to recover in addition to costs such sum as the court may adjudge
reasonable as attorney fees at trial or on any appeal or review.
16.4 NOTICES. Any notice required or permitted under this lease shall be
given when actually delivered or 48 hours after deposited in United States mail
as certified mail, return receipt requested, addressed to the address first
given in this lease or to such other address as may be specified from time to
time by either of the parties in writing.
16.5 SUCCESSION. Subject to the above-stated limitations on transfer of
Tenant's interest, this lease shall be binding upon and inure to the benefit of
the parties, their respective successors and assigns.
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<PAGE>
16.6 LANDLORD'S RIGHT TO CURE DEFAULTS. If Tenant fails to perform any
obligation under this lease, Landlord shall have the option to do so after ten
(10) days' written notice to Tenant. All of Landlord's expenditures to correct
the default shall be reimbursed by Tenant on demand with interest at the rate of
twelve percent (12%) per annum from the date of expenditure by Landlord.
16.7 RECORDATION. This lease shall not be recorded without the consent in
writing of Landlord, which shall not be unreasonably withheld or delayed.
16.8 ENTRY FOR INSPECTION. Landlord shall have the right to enter upon the
premises at any reasonable time and after reasonable notice to determine
Tenant's compliance with this lease, and in addition shall have the right, at
any time during the last six (6) months of the term of this lease or any renewal
thereof, to place and maintain upon the premises notices for leasing of the
premises.
16.9 PRORATION OF RENT. In the event of commencement or termination of this
lease at a time other than the beginning or end of one of the specified rental
periods, then the rent shall be prorated as of the date of commencement or
termination and in the event of termination for reasons other than default, all
prepaid rent shall be refunded to Tenant or paid on its account.
SECTION 17. ARBITRATION
Landlord may at any time, and Tenant may at any time when not in default in
the payment of any amount due hereunder, request arbitration of any matter in
dispute. The party requesting arbitration shall do so by giving notice to that
effect to the other party, specifying in such notice the nature of the dispute,
and such dispute shall then be determined in the City of Portland, by a single
arbitrator, in accordance with the rules then pertaining to the Arbitration
Service of Portland, Inc. or the American Arbitration Association, whichever
organization is selected by the party initiating arbitration, except to the
extent provider otherwise under Oregon laws on arbitration and is otherwise
provided herein. In the event the parties cannot agree upon an arbitrator,
either party may petition the Presiding Judge of the Circuit Court of Multnomah
County, Oregon, to appoint the arbitrator. Any such appointed arbitrator shall
be a qualified expert with respect to the subject in dispute as determined by
the Presiding Judge. Each party shall submit its position to the arbitrator and
the arbitrator shall chose the position of one of the parties. The award in such
arbitration may be enforced on the application of either party by the order of
judgment of a court of competent jurisdiction. The fees and expenses of any
arbitration shall be borne by the losing party. The prevailing party shall be
entitled to recover from the losing party the expense of its attorneys and
experts as well as a reasonable amount for its own personnel time incurred in
connection with any arbitration.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this lease, in duplicate, on
the day and year first set forth above.
Landlord: HEALTHFIRST PROPERTIES, L.L.C.
By: /s/ Russell A Dow, M.D.
-----------------------------------
Its: Manager
Tenant: HEALTHFIRST MEDICAL GROUP, P.C.
By: /s/ Matthew M. Shelley, M.D.
-----------------------------------
Its: President
14 - MEDICAL OFFICE LEASE
<PAGE>
EXHIBIT A
Tualatin Property
PARCEL I:
A portion of that certain tract deeded to John J. Hinderman and Aimee Hinderman
as described in deed of record in Book 184, at Page 511, Washington County,
Oregon Deed Records, said portion being more particularly described as follows:
BEGINNING at a point on the East line of Section 24, Township 2 South, Range
1 West of the Willamette Meridian, in Washington County, Oregon, the same
being the East line of Lot 1, TUALATIN GARDENS, 440.8 feet North of the
Southeast corner of said Lot l, and 440.8 feet North of the Southeast corner
of Section 24; thence West 50 feet to an iron pipe at the Southwest corner of
a tract of land conveyed by deed to Washington County, Oregon, as recorded on
Page 331 of Volume 152, Deed Records of Washington County, Oregon; thence
North parallel with and 50 feet distant West from the East line of said Lot
1, a distance of 71.8 feet to an iron pipe; thence South 89 DEG. 8' West
parallel with the South line of said Section 24, 412 feet to a point marked
by an iron pipe; thence South parallel with the East line of said Section 24,
175 feet to a point; thence North 89 DEG. 8' East 462 feet to the East line
of said Section 24; thence North along the East line of said Section 24, to
the point of beginning.
EXCEPTING THEREFROM that portion conveyed to the City of Tualatin by document
recorded June 20, 1973, in Book 931, Page 215.
PARCEL II:
BEGINNING at an iron rod on the West line of that certain tract of land
conveyed to Washington County by deed recorded in Book 152, Page 331,
Washington County Deed Records, which iron rod is North 440.8 feet, West 50.0
feet, and North 171.8 feet from the Southeast corner of Section 24, Township
2 South, Range 1 West of the Willamette Meridian, and is also North 171.8
feet from the Southwest corner of the said Washington County tract, and
running thence South 89 DEG. 08' West parallel to the North line of that
certain tract of land conveyed to Perry B. Foster, Jr. and Dorothy M. Foster,
husband and wife, by deed recorded in Book 311, Page 232, said Deed Records,
a distance of 412.0 feet to an iron rod; thence South on the West line of the
said Foster tract, 100.0 feet, more or less, to the Northwest corner of that
certain tract of land conveyed to Henry E. Bursaw and Harriet G. Bursaw, by
deed recorded in Book 491, Page 266, said Deed Records; thence North 89 DEG.
08' East along the North line of said Bursaw tract, 412.0 feet to an iron
pipe at the most Northerly Northeast corner of the said Bursaw tract, and
from which pipe the Southwest corner of the aforesaid Washington County tract
bears South 71.8 feet; thence North along the West line of the said
Washington County tract, 100.0 feet to the point of beginning.
EXCEPTING THEREFROM that portion conveyed to the City of Tualatin by document
recorded June 20, 1973, in Book 931, Page 215.
<PAGE>
PARCEL III:
BEGINNING at an iron pipe at the Southeast corner of Section 24, Township 2
South, Range 1 West of the Willamette Meridian, in the County of Washington
and State of Oregon, said beginning point being the Southeast corner of Lot 1
of TUALATIN GARDENS, as shown on the duly recorded map and plat thereof, in
the County of Washington and State of Oregon, said beginning point being the
Southeast corner of that certain 14-acre tract of land conveyed by deed to F.
H. and LaDessa Hocken, as recorded at Page 332 of Volume 159 of Washington
County Record of Deeds, and running thence from said point of beginning North
along the East line of said Section 24 and the East line of the said Hocken
tract, 440.8 feet to the Southeast corner of that certain 0.579-acre tract of
land conveyed by deed to Washington County, Oregon, as recorded at Page 331
of Volume 152, Deed Records for said county; thence West 50.0 feet to an iron
pipe at the Southwest corner of the said Washington County tract; thence
North parallel with and 50 feet distant West from East line of said Lot 1, a
distance of 71.8 feet to an iron pipe; thence South 89 DEG. 08' West parallel
with the South line of the said Hocken tract, 412.0 feet to an iron pipe on
the West line thereof; thence South along the West line of the said Hocken
tract, 513.4 feet to the Southwest corner thereof; thence North 89 DEG. 08'
East along the South line of the said Hocken tract, a distance of 462.0 feet
to the place of beginning.
EXCEPTING THEREFROM that portion thereof described in contract to Henry E.
Bursaw and Harriet G. Bursaw, recorded in Volume 450, Page 547, Deed Records of
said county.
AND FURTHER EXCEPTING THEREFROM those portions conveyed to the City of Tualatin
by documents recorded June 22, 1995 as Fee Nos. 95042799 and 95042800.
<PAGE>
EXHIBIT B
Westside Property
Maximum Yearly Rent
3%
YEAR RENT
---- ----
1996 677,250
1997 697,568
1998 718,495
1999 740,049
2000 762,251
2001 785,118
2002 808,672
2003 832,932
2004 857,920
2005 883,658
2006 910,167
2007 937,472
2008 965,597
2009 994,564
2010 1,024,401
2011 1,055,133
2012 1,086,787
2013 1,119,391
2014 1,152,973
2015 1,187,562
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<PAGE>
MEDICAL OFFICE LEASE
BETWEEN: HealthFirst Properties, L.L.C., whose address is 265 N. Broadway,
Portland, OR 97227 ("Landlord");
AND: HealthFirst Medical Group, P.C. whose address is 265 N. Broadway,
Portland, OR 97227 ("Tenant").
DATED AS OF: May 1, 1996
Landlord hereby leases to Tenant the real property legally described in the
attached Exhibit A, together with all improvements thereon, on the terms and
conditions stated below:
SECTION 1: OCCUPANCY
1.1 TERM. The term of this lease shall commence on the date of this
Agreement set forth above (the "Commencement Date") and shall expire on April
30, 2016, unless sooner terminated pursuant to the provisions hereof.
1.2 POSSESSION. Tenant's right to possession and obligations under the
lease shall commence on the Commencement Date.
SECTION 2: RENT
2.1 BASIC RENT. Beginning on the Commencement Date, Tenant shall pay basic
rent to Landlord of $31,062.50 per month. Rent shall be adjusted annually based
on the annual change in the Consumer Price Index for All Urban Consumers,
published by the Bureau of Labor Statistics of the United States Department of
Labor, for Portland-Vancouver (1977=100) or any other successor or substitute
index selected by Landlord, with a cumulative maximum yearly increase of three
percent (3%), such that the rent for any lease year shall not exceed the amount
set forth on the attached Exhibit B. At no time shall basic rent be less than
the basic rent for the previous lease year. Basic rent shall be payable on the
first day of each month in advance at such place as may be designated by
Landlord.
2.2 ADDITIONAL RENT. All taxes, insurance costs, utility charges, repairs
and maintenance and any other sum which Tenant is required to pay to Landlord or
third parties shall be additional rent.
2.3 LATE CHARGE. If any portion of the basic rent remains unpaid for ten
(10) or more calendar days after the date on which
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<PAGE>
such amount is due, Tenant shall pay to Landlord a late charge in an amount
equal to five percent (54) of such delinquent payment. Tenant agrees that such
amount is a reasonable estimate of Landlord's collection and administrative
expenses.
SECTION 3. USE OF THE PREMISES
3.1 PERMITTED USE. The premises shall be used for medical office purposes
and uses related thereto, but for no other purpose without the prior written
consent of Landlord, which consent shall not be unreasonably withheld or
delayed.
3.2 RESTRICTIONS ON USE. In connection with its use of the premises,
Tenant shall, subject to Section 4.1:
(a) Conform to all applicable laws and regulations of any public
authority affecting the premises and correct at Tenant's own
expense any failure of compliance created through Tenant's fault
or by reason of Tenant's use.
(b) Refrain from any use which would be reasonably offensive to other
tenants or owners or users of neighboring premises or which would
tend to create a nuisance or damage the reputation of the
premises.
SECTION 4: REPAIRS AND MAINTENANCE
4.1 LANDLORD'S OBLIGATIONS. The premises are being leased in an "as is"
condition and Landlord shall not be liable for repairs or maintenance of the
premises or other charges, except for replacement and maintenance of the roof,
exterior walls (excluding painting), bearing walls, structural members and
foundation.
4.2 TENANT'S OBLIGATIONS. All repairs and maintenance to the premises not
otherwise the responsibility of Landlord pursuant to section 4.1 shall be the
responsibility of the Tenant including, but not limited to, the following:
(a) Repair of sidewalks, driveways, curbs and parking areas.
(b) Repair and maintenance of water, sewage, gas and electrical
services.
(c) Repair of the heating and air conditioning system, including
ordinary maintenance.
(d) Repair of interior walls, ceilings, doors and windows and related
hardware, light fixtures, switches, and wiring and plumbing.
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<PAGE>
(e) Maintain the exterior and interior of the premises in good
condition.
(f) Any repairs (including those for which Landlord would otherwise
be responsible pursuant to section 4.1) necessitated by the
negligence of Tenant, its agents, employees, and invitees.
(g) Any repairs or alterations required under Tenant's obligation to
comply with laws and regulations as set forth in 4.2(a) above.
4.3 REIMBURSEMENT FOR REPAIRS ASSUMED. If Tenant fails or refuses to make
repairs which are required by this Section 4, the Landlord may make the repairs
and charge the actual costs of repairs to Tenant. Such expenditures by Landlord
shall be reimbursed by Tenant on demand together with interest at the rate of
twelve percent (12%) per annum from the date of expenditure by Landlord. Except
in an emergency creating an immediate risk of personal injury or property
damage, Landlord shall not perform repairs which are the obligation of Tenant
and charge the Tenant for the resulting expense unless at least fifteen (15)
days before work is commenced Tenant is given notice in writing outlining with
reasonable particularity the repairs required, and Tenant fails within that time
to initiate such repairs in good faith.
4.4 INSPECTION OF PREMISES. Landlord shall have the right to inspect the
premises at any reasonable time after reasonable notice to Tenant, to determine
the necessity of repairs and/or maintenance.
SECTION 5: ALTERATIONS
5.1 ALTERATIONS PROHIBITED. Tenant shall make no improvements or
alterations on the premises of any kind without first obtaining Landlord's
written consent, which consent shall not be unreasonably withheld or delayed.
5.2 OWNERSHIP OF ALTERATIONS. All improvements and alterations performed
on the premises by either Landlord or Tenant shall be the property of Landlord
when installed unless the applicable Landlord's consent provides otherwise.
SECTION 6: FIRE INSURANCE
6.1 INSURANCE REQUIRED. Tenant shall keep the premises, including all
buildings, other improvements and landscape, insured at Tenant's expense against
fire and other risks covered by a standard fire insurance policy with an
endorsement for extended coverage. The policy shall be written for the full
insurable value, with loss payable to Landlord, and the policy or a certificate
of insurance shall be delivered to Landlord and shall
3 - MEDICAL OFFICE LEASE
<PAGE>
contain a stipulation providing that coverage will not be canceled or diminished
without a minimum of thirty (30) days written notice to Landlord. Tenant shall
bear the expense of any insurance insuring the property of Tenant on the
premises.
6.2 WAIVER OF SUBROGATION. So long as Tenant maintains the insurance
required by section 6.1, Tenant shall not be liable to Landlord and Landlord
shall in no event be liable to Tenant for any loss or damage caused by fire or
any of the risks enumerated in a standard fire insurance policy with an extended
coverage endorsement, and in the event of insured loss neither party's insurance
company shall have a subrogated claim against the other.
SECTION 7: TAXES AND UTILITIES
7.1 REAL PROPERTY TAXES. Tenant shall pay all real property taxes levied
against the premises within ten (10) days after receipt of notice from Landlord
of the total amount of the tax due.
7.2 PERSONAL PROPERTY TAXES. Tenant shall pay as due all taxes on its
personal property located on the premises.
7.3 SPECIAL ASSESSMENTS. If an assessment for a public improvement is
made against the premises, the assessment shall be paid by Tenant, who may elect
to cause such assessment to be paid in any legally-permitted installments.
Tenant shall only be obligated to pay such installments arising during the term
of this lease.
7.4 CONTEST OF TAXES. Tenant shall be permitted to contest the amount of
any tax so long as such contest is conducted in a manner which does not cause
any risk that Landlord's interest in the leased premises will be foreclosed for
nonpayment. Landlord, at no cost to Landlord, shall cooperate in any reasonable
manner with such contest by Tenant.
7.5 PRORATION OF TAXES. Tenant's share of real property taxes for the
year in which this lease commences or terminates shall be prorated based upon
the portion of the tax year that this lease is in effect.
7.6 UTILITY CHARGES. Tenant shall pay when due all charges for
electricity, gas, water, sanitary and storm sewage, garbage removal, telephone
service and any other utilities of any kind furnished to the premises.
SECTION 8: DAMAGE AND DESTRUCTION
8.1 PARTIAL DAMAGE. If the premises are partly damaged and paragraph 8.2
below does not apply, the premises shall be repaired by Landlord to the
condition existing prior to the damage up to, but not to exceed, the amount of
available insurance proceeds (less
4 - MEDICAL OFFICE LEASE
<PAGE>
Landlord's reasonable expenses to obtain such proceeds). Repairs shall be
accomplished with all reasonable dispatch subject to interruptions and delays
from matters beyond the control of Landlord. All repairs shall be done by
Landlord in such a way as to interfere as little as reasonably possible with the
use of the premises by Tenant.
8.2 DESTRUCTION. If the premises are destroyed or damaged such that the
cost of repair exceeds fifty (50) percent of the value of the structure before
the damage, either party may elect to terminate the lease as of the date of the
damage or destruction by notice given to the other in writing not more than
forty-five (45) days following the date of damage. In such event all rights and
obligations of the parties shall cease as of the date of termination, and Tenant
shall be entitled to the reimbursement of any prepaid amounts paid by Tenant and
attributable to the anticipated term. If neither party elects to terminate,
Landlord shall proceed to restore the premises to substantially the same form as
prior to the damage or destruction up to, but not to exceed, the amount of
available insurance proceeds (less Landlord's reasonable expenses to obtain such
proceeds). Work shall be commenced as soon as reasonably possible and thereafter
shall proceed without interruption except for work stoppages due to causes
beyond the control of Landlord.
8.3 RENT ABATEMENT. Rent shall be abated during the repair of any damage
to the extent the premises are untenantable. Tenant shall have no claim against
Landlord for any inconvenience resulting from Landlord's activities performed in
conformance with the requirement of this section.
SECTION 9: EMINENT DOMAIN
9.1 PARTIAL TAKING. If a portion of the premises is condemned and
paragraph 9.2 does not apply the lease shall continue on the following terms:
(a) Landlord shall be entitled to all of the proceeds of
condemnation, and Tenant shall have no claim against Landlord as
a result of the condemnation.
(b) Landlord shall proceed as soon as reasonably possible to make
such repairs and alterations to the premises as are necessary to
restore the remaining premises to a condition as comparable as
reasonably practicable to that existing at the time of the
condemnation up to, but not to exceed, the amount of the
condemnation award (less Landlord's reasonable expenses to obtain
such award). Work shall proceed without interruption except for
work stoppages due to causes beyond the control of Landlord.
5 - MEDICAL OFFICE LEASE
<PAGE>
(c) After the date on which title vests in the condemning authority
or an earlier date on which alterations or repairs are commenced
by Landlord to restore the balance of the premises in
anticipation of taking, the rent shall be reduced in proportion
to the reduction in value of the premises as an economic unit on
account of the partial taking. If the parties are unable to
agree upon the amount of the reduction of rent, the amount shall
be determined by arbitration in the manner as is provided in
Section 17.
9.2 TOTAL TAKING. If a condemning authority takes all of the premises or
a portion sufficient to render the remaining premises reasonably unsuitable for
the use which Tenant was then making of the premises, as reasonably determined
by Landlord, the lease shall terminate as of the date the title vests in the
condemning authority. Such termination shall have the same effect as a
termination under paragraph 9.1(a) above.
9.3 SALE IN LIEU OF CONDEMNATION. Sale of all or part of the premises to
a purchaser with the power of eminent domain in the face of a threat or
probability of the exercise of the power shall be treated for the purposes of
this Section 9 as a taking by condemnation.
9.4 NOTICE OF ACTION. If either party receives notice of a condemnation
proceeding or a threat or probability thereof or of any action in lieu thereof,
such party shall promptly provide a copy of such notice to the other party.
SECTION 10: LIABILITY AND INDEMNITY
10.1 LIENS.
(a) Except with respect to activities for which Landlord may be
responsible, Tenant shall pay as due all claims for work done on
and for services rendered or material furnished to the premises
and shall keep the premises free from any liens. If Tenant fails
to pay any such claims or to discharge any lien, Landlord may do
so and collect the cost as additional rent. Any amount so added
shall bear interest at the rate of twelve percent (12%) per annum
from the date expended by Landlord and shall be payable on
demand. Such action by Landlord shall not constitute a waiver of
any right or remedy which Landlord may have on account of
Tenant's default.
(b) Tenant may withhold payment of any claim in connection with a
good-faith dispute over the
6 - MEDICAL OFFICE LEASE
<PAGE>
obligation to pay, so long as Landlord's property interests are
not jeopardized. If a lien is filed as a result of nonpayment,
Tenant shall, within ten (10) days after knowledge of the filing,
secure the discharge of the lien or deposit with Landlord cash or
sufficient corporate surety bond or other surety satisfactory to
Landlord in an amount sufficient to discharge the lien plus any
costs, attorney fees, and other charges that could accrue as a
result of a foreclosure or sale under the lien.
10.2 INDEMNIFICATION. Tenant shall indemnify and defend Landlord from any
claim, loss, or liability arising out of or related to any activity of Tenant on
the premises or any condition of the premises in the possession or under the
control of Tenant. Landlord shall have no liability to Tenant for any loss or
damage caused by third parties or by any condition of the premises.
10.3 LIABILITY INSURANCE. During the term of this lease Tenant shall
carry the following insurance at Tenant's cost with companies reasonably
acceptable to Landlord: public liability and property damage insurance in a
responsible company with limits of not less than $2,000,000 combined limit.
Such insurance shall cover all risks arising directly or indirectly out of
Tenant's activities on or any condition of the premises whether or not related
to an occurrence caused or contributed to by Landlord's negligence, shall
protect Tenant against the claims of Landlord on account of the obligations
assumed by Tenant under paragraph 10.2, and shall protect Landlord and Tenant
against claims of third persons. Certificates evidencing such insurance and
bearing endorsements requiring thirty (30) days' written notice to Landlord
prior to any change or cancellation shall be furnished to Landlord prior to
Tenant's occupancy of the premises. Landlord shall be named as an additional
insured on such policy or policies.
10.4 HAZARDOUS SUBSTANCES. Tenant shall not generate, release, store, or
deposit on the premises any environmentally hazardous or toxic substances,
materials, wastes, pollutants, oils, or contaminants, as defined by any federal,
state, or local law or regulation (collectively "Hazardous Substances"), except
those used in the normal course of tenant's business in commercially-reasonable
amounts and in compliance with all applicable laws. Tenant shall indemnify and
hold harmless Landlord from and against any and all claims, losses, damages,
response costs and expenses of any nature whatsoever arising out of or in any
way related to the generation, release, storage, or deposit of Hazardous
Substances on the premises by Tenant or any other person or entity other than
Landlord. Promptly upon written notice from Landlord or any governmental
entity, Tenant shall remove from the premises (including without limitation the
soil or water table thereof) all hazardous substances, and shall restore the
premises to a clean,
7 - MEDICAL OFFICE LEASE
<PAGE>
safe, good, and serviceable condition. Any such clean-up shall be in conformance
with all applicable governmental rules and regulations.
Notwithstanding the foregoing, Tenant shall have no liability for and
Landlord shall indemnify and hold harmless Tenant from and against any and all
claims, losses, damages, response costs and expenses of any nature whatsoever
arising out of or in any way related to the generation, release, storage, or
deposit of Hazardous Substances on the premises prior to the date of this lease,
unless caused by Tenant or its agents, employees or invitees.
SECTION 11: QUIET ENJOYMENT; MORTGAGE PRIORITY
11.1 LANDLORD'S WARRANTY. Landlord warrants that it is the contract
vendee of the premises and has the right to lease the same. Provided that Tenant
is not in default hereunder, Landlord will defend Tenant's right to quiet
enjoyment of the premises from the lawful claims of all persons during the lease
term and any renewals thereof.
11.2 MORTGAGE PRIORITY. This lease is and shall be prior to any mortgage
or deed of trust ("Encumbrance") recorded after the date of this lease and
affecting the premises. However, if any lender holding such an Encumbrance
requires that this lease be subordinate to the encumbrance, then Tenant agrees
that the lease shall be subordinate to the encumbrance if the holder thereof
agrees in writing with Tenant that so long as Tenant performs its obligations
under this lease, no foreclosure, deed given in lieu of foreclosure, or sale
pursuant to the terms of the Encumbrance, or other steps or procedures taken
under the Encumbrance shall affect Tenant's rights under this lease. If the
foregoing condition is met Tenant shall execute the written agreement and any
other documents reasonably required by the holder of the encumbrance to
accomplish the purposes of this paragraph. If the premises are sold as a result
of foreclosure of any encumbrance thereon, or otherwise transferred by Landlord
or any successor, Tenant shall attorn to the purchaser or transferee.
11.3 ESTOPPEL CERTIFICATE. Either party will within twenty (20) days
after notice from the other execute and deliver to the other party a certificate
stating whether or not this lease has been modified and is in full force and
effect and specifying any modifications or alleged breaches by the other party.
The certificate shall also state the amount of monthly base rent and the dates
to which rent has been paid in advance.
SECTION 12: ASSIGNMENT AND SUBLEASE
No part of the premises may be assigned, mortgaged, subleased, or otherwise
transferred, nor may a right of use of any portion of
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<PAGE>
the premises be conferred on any third person by any other means, whether
voluntarily or by operation of law, without the prior written consent of
Landlord, which shall not be unreasonably withheld or delayed. No consent in one
instance shall prevent the provision from applying to a subsequent issuance.
Landlord's consent to any assignment of subletting by Tenant shall not relieve
Tenant of any obligations to be performed by Tenant hereunder, whether occurring
before or after such assignment of subletting, unless Landlord grants to Tenant
a release in writing.
SECTION 13: DEFAULT
13.1 DEFAULT IN RENT. Failure of Tenant to pay any rent or other charge
within ten (10) days after it is due.
13.2 DEFAULT IN OTHER COVENANTS. Failure of Tenant to comply with any
term or condition or fulfill any obligation of the lease (other than the payment
of rent or other charges) within twenty (20) days after written notice by
Landlord specifying the nature of the default with reasonable particularity. If
the default is of such a nature that it cannot be completely remedied within the
20-day period, this provision shall be complied with if Tenant begins correction
of the default within the 20-day period and thereafter proceeds with reasonable
diligence and in good faith to effect the remedy as soon as practicable.
13.3 INSOLVENCY. Insolvency of Tenant; an assignment by Tenant for the
benefit of creditors; the filing by Tenant of a voluntary petition in
bankruptcy; an adjudication that Tenant is bankrupt or the appointment of a
receiver of the properties of Tenant; the filing of any involuntary petition of
bankruptcy and failure of Tenant to secure a dismissal of the petition within
forty-five (45) days after filing; attachment of or the levying of execution on
the leasehold interest and failure of Tenant to secure discharge of the
attachment or release of the levy of execution within ten (10) days.
13.4 ABANDONMENT: Failure of Tenant for five (5) days or more to occupy
the premises for the purposes permitted under this lease unless such failure is
excused under other provisions of this lease.
SECTION 14: REMEDIES ON DEFAULT
14.1 TERMINATION. In the event of a default the lease may be terminated
at the option of Landlord by notice in writing to Tenant. If the lease is not
terminated by election of Landlord or otherwise, Landlord shall be entitled to
recover damages from Tenant for the default. If the lease is terminated,
Tenant's liability to Landlord for damages shall survive such termination, and
Landlord may reenter, take possession of the premises, and
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<PAGE>
remove any persons or property under any rights or remedies provided by law.
14.2 RELETTING. Following reentry or abandonment, Landlord may relet the
premises and in that connection may make any suitable alterations or refurbish
the premises, or both, or change the character or use of the premises, but
Landlord shall not be required to relet for any use or purpose other than that
specified in the lease or which Landlord may reasonably consider injurious to
the premises, or to any tenant which Landlord may reasonably consider
objectionable. Landlord may relet all or part of the premises, alone or in
conjunction with other properties, for a term longer or shorter than the term of
this lease, upon any reasonable terms and conditions, including the granting of
some rent-free occupancy or other rent concession.
14.3 DAMAGES. In the event of termination on default Landlord shall be
entitled to recover immediately, without waiting until the due date of any
future rent or until the date fixed for expiration of the lease term, the
following amounts as damages:
(a) The loss of reasonable rental value from the date of default
until a new tenant has been, or with the exercise of reasonable
efforts could have been, secured.
(b) The reasonable costs of reentry and reletting including without
limitation the cost of any clean up, refurbishing, removal of
Tenant's property and fixtures, or any other expense occasioned
by Tenant's failure to quit the premises upon termination and to
leave them in the required condition, any remodeling costs,
attorney fees, court costs, broker commissions, and advertising
costs.
(c) Any excess of the value of the rent and all of Tenant's other
obligations under this lease over the reasonable expected return
from the premises for the period commencing on the earlier of the
date of trial or the date the premises are relet and continuing
through the end of the term. The present value of future amounts
will be computed using a discount rate equal to the prime loan
rate of United States National Bank of Oregon.
14.4 RIGHT TO SUE MORE THAN ONCE. Landlord may sue periodically to
recover damages during the period corresponding to the remainder of the lease
term, and no action for damages shall bar a later action for damages
subsequently accruing.
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<PAGE>
14.5 REMEDIES CUMULATIVE. The foregoing remedies shall be in addition to
and shall not exclude any other remedy available to Landlord under applicable
law.
SECTION 15: SURRENDER AT EXPIRATION
15.1 CONDITION OF PREMISES. Upon expiration of the lease term or earlier
termination on account of default, Tenant shall deliver all keys and surrender
possession of the premises in good condition and broom clean. Alterations
constructed by Tenant with permission from Landlord shall not be removed or
restored to the original condition unless the terms of permission for the
alteration so require.
15.2 FIXTURES
(a) All fixtures placed upon the premises during the term, other than
Tenant's trade fixtures, shall, at Landlord's option, become the
property of Landlord. If Landlord so elects, Tenant shall remove
any or all fixtures which would otherwise remain the property of
Landlord, and shall repair any physical damage resulting from the
removal. If Tenant fails to remove such fixtures, Landlord may do
so and charge the cost to Tenant with interest at the legal rate
from the date of expenditure.
(b) Prior to expiration or termination of the lease term Tenant
shall remove all furnishings, furniture, and trade fixtures
which remain its property. If Tenant fails to do so, this shall
be an abandonment of the property, and Landlord may retain the
property and all rights of Tenant with respect to it shall cease
or, by notice in writing given to Tenant within twenty (20) days
after removal was required, Landlord may elect to hold Tenant to
its obligation of removal. If Landlord elects to require Tenant
to remove, Landlord may effect a removal and place the property
in public storage for Tenant's account. Tenant shall be liable
to Landlord for the cost of removal, transportation to storage,
and storage, with interest at the legal rate on all such expenses
from the date of expenditure.
15.3 HOLDOVER:
(a) If Tenant does not vacate the premises at the time required,
Landlord shall have the option to treat Tenant as a tenant from
month to month, subject to all of the provisions of this lease
except the
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<PAGE>
provisions for term and renewal, and the provision for rent,
which shall be equal to one hundred fifty percent (150%) of the
last rental payable under the lease. Failure of Tenant to remove
fixtures, furniture, furnishings, or trade fixtures which
Tenant is required to remove under this lease shall constitute a
failure to vacate to which this paragraph shall apply if the
property not removed will substantially interfere with occupancy
of the premises by another tenant or with occupancy by Landlord
for any purpose including preparation for a new tenant.
(b) If a month-to-month tenancy results from a holdover by Tenant
under this paragraph 15.3, the tenancy shall be terminable at the
end of any monthly rental period on written notice from Landlord
given not less than ten (10) days prior to the termination date
which shall be specified in the notice. Tenant waives any notice
which would otherwise be provided by law with respect to a month-
to-month tenancy.
SECTION 16: MISCELLANEOUS
16.1 TIME OF ESSENCE. Time is of the essence of the performance of
Tenant's obligations hereunder.
16.2 NONWAIVER. Waiver by either party of strict performance of any
provision of this lease shall not be a waiver of or prejudice the party's right
to require strict performance of the same provision in the future or of any
other provision.
16.3 ATTORNEYS' FEES. If suit or action is instituted in connection with
any controversy arising out of this lease, the prevailing party shall be
entitled to recover in addition to costs such sum as the court may adjudge
reasonable as attorney fees at trial or on any appeal or review.
16.4 NOTICES. Any notice required or permitted under this lease shall be
given when actually delivered or 48 hours after deposited in United States mail
as certified mail, return receipt requested, addressed to the address first
given in this lease or to such other address as may be specified from time to
time by either of the parties in writing.
16.5 SUCCESSION. Subject to the above-stated limitations on transfer of
Tenant's interest, this lease shall be binding upon and inure to the benefit of
the parties, their respective successors and assigns.
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<PAGE>
16.6 LANDLORD'S RIGHT TO CURE DEFAULTS. If Tenant fails to perform any
obligation under this lease, Landlord shall have the option to do so after ten
(10) days' written notice to Tenant. All of Landlord's expenditures to correct
the default shall be reimbursed by Tenant on demand with interest at the rate of
twelve percent (12%) per annum from the date of expenditure by Landlord.
16.7 RECORDATION. This lease shall not be recorded without the consent in
writing of Landlord, which shall not be unreasonably withheld or delayed.
16.8 ENTRY FOR INSPECTION. Landlord shall have the right to enter upon
the premises at any reasonable time and after reasonable notice to determine
Tenant's compliance with this lease, and in addition shall have the right, at
any time during the last six (6) months of the term of this lease or any renewal
thereof, to place and maintain upon the premises notices for leasing of the
premises.
16.9 PRORATION OF RENT. In the event of commencement or termination of
this lease at a time other than the beginning or end of one of the specified
rental periods, then the rent shall be prorated as of the date of commencement
or termination and in the event of termination for reasons other than default,
all prepaid rent shall be refunded to Tenant or paid on its account.
SECTION 17. ARBITRATION
Landlord may at any time, and Tenant may at any time when not in default in
the payment of any amount due hereunder, request arbitration of any matter in
dispute. The party requesting arbitration shall do so by giving notice to that
effect to the other party, specifying in such notice the nature of the dispute,
and such dispute shall then be determined in the City of Portland, by a single
arbitrator, in accordance with the rules then pertaining to the Arbitration
Service of Portland, Inc. or the American Arbitration Association, whichever
organization is selected by the party initiating arbitration, except to the
extent provider otherwise under Oregon laws on arbitration and is otherwise
provided herein. In the event the parties cannot agree upon an arbitrator,
either party may petition the Presiding Judge of the Circuit Court of Multnomah
County, Oregon, to appoint the arbitrator. Any such appointed arbitrator shall
be a qualified expert with respect to the subject in dispute as determined by
the Presiding Judge. Each party shall submit its position to the arbitrator and
the arbitrator shall chose the position of one of the parties. The award in such
arbitration may be enforced on the application of either party by the order of
judgment of a court of competent jurisdiction. The fees and expenses of any
arbitration shall be borne by the losing party. The prevailing party shall be
entitled to recover from the losing party the expense of its attorneys and
experts as well as a reasonable amount for its own personnel time incurred in
connection with any arbitration.
13 - MEDICAL OFFICE LEASE
<PAGE>
IN WITNESS WHEREOF, the parties have executed this lease, in duplicate, on
the day and year first set forth above.
Landlord: HEALTHFIRST PROPERTIES, L.L.C.
By: /s/ Russell A. Dow, M.D.
-----------------------------------------------
Its: Manager
Tenant: HEALTHFIRST MEDICAL GROUP, P.C.
By: /s/ Matthew M. Shelley, M.D.
-----------------------------------------------
Its: President
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<PAGE>
EXHIBIT A
Westside Property
PARCEL I:
Lot 8 and that portion of Lot 9, QUADRANT EAST, Washington County, Oregon,
described as follows:
BEGINNING at the Southeast corner of said Lot 9 and running thence North
64-DEG-36'00" West on the South line of said Lot 9, a distance of 266.00 feet
to a point on the East line of Tract "E" said plat; thence on East and North
side of said Tract "E", the following courses: North 20-DEG-35'43" East, a
distance of 30.00 feet; thence North 69-DEG-24'17" West, distance of 30.00
feet to a point on the West line of said Lot 9; thence North 20-DEG-35'43"
East on the West line of said Lot 9, a distance of 127.36 feet to a point on
the proposed South right-of-way line of U.S. Highway 26; thence South
60-DEG-21'00" East on said South right-of-way line, a distance of 209.19
feet to an angle point; thence South 51-DEG-49'09" East, a distance of 44.10
feet to the intersection point with the East line of said Lot 9; thence South
01-DEG-23'46" West on said East lot line, a distance of 141.25 feet to the
point of beginning.
PARCEL II:
Lot 10, QUADRANT EAST, Washington County, Oregon.
EXCEPTING THEREFROM that portion conveyed to the State of Oregon by and through
its Department of Transportation, Highway Division, recorded March 28, 1990,
Recorder's Fee No. 90 14985.
<PAGE>
EXHIBIT B
Westside Property
Maximum Yearly Rent
3%
YEAR RENT
- ---- ----
1996 372,750
1997 383,933
1998 395,450
1999 407,314
2000 419,533
2001 432,119
2002 445,083
2003 458,435
2004 472,189
2005 486,354
2006 500,945
2007 515,973
2008 531,452
2009 547,396
2010 563,818
2011 580,732
2012 598,154
2013 616,099
2014 634,582
2015 653,619
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- ------------------------------------------------------------------------------
BUILDING LEASE AGREEMENT
BY AND BETWEEN
LEGACY HEALTH SYSTEM, LANDLORD
AND
SUBURBAN MEDICAL CLINIC, INC.
TENANT
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
1. Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4. Adjustment to Rent . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.1 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.2 Real Property Taxes, Assessments. . . . . . . . . . . . . . . . 5
5. Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6. Repairs and Maintenance. . . . . . . . . . . . . . . . . . . . . . . 6
6.1 Landlord's Obligations. . . . . . . . . . . . . . . . . . . . . 6
6.2 Tenant's Obligations. . . . . . . . . . . . . . . . . . . . . . 6
6.3 Landlord's Interference with Tenant . . . . . . . . . . . . . . 6
6.4 Reimbursement for Repairs Assumed . . . . . . . . . . . . . . . 7
6.5 Access to Premises . . . . . . . . . . . . . . . . . . . . . . 7
7. Personal Property Taxes. . . . . . . . . . . . . . . . . . . . . . . 7
8. Tenant's Property. . . . . . . . . . . . . . . . . . . . . . . . . . 7
9. Improvements and Alterations by Tenant . . . . . . . . . . . . . . . 7
10. Late Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
11. Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
12. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
13. Parking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
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14. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
15. Waiver of Subrogation. . . . . . . . . . . . . . . . . . . . . . . . 9
16. Destruction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
17. Option to Purchase . . . . . . . . . . . . . . . . . . . . . . . . . 9
18. Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
19. Assignment and Succession. . . . . . . . . . . . . . . . . . . . . .10
20. Defaults; Remedies . . . . . . . . . . . . . . . . . . . . . . . . .10
20.2 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . .11
20.3 Notice by Tenant of Default . . . . . . . . . . . . . . . . . .11
20.4 Landlord's Right to Cure Defaults . . . . . . . . . . . . . . .11
21. Removal of Property. . . . . . . . . . . . . . . . . . . . . . . . .11
22. Mortgages, Deeds of Trust. . . . . . . . . . . . . . . . . . . . . .12
23. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
24. Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
25. Attorney's Fees. . . . . . . . . . . . . . . . . . . . . . . . . . .12
26. No Hold-Over Tenancy . . . . . . . . . . . . . . . . . . . . . . . .12
27. Paragraph Headings . . . . . . . . . . . . . . . . . . . . . . . . .12
28. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
29 Hazardous Materials. . . . . . . . . . . . . . . . . . . . . . . . .13
ii
<PAGE>
LEGACY HEALTH SYSTEM
BUILDING LEASE
This lease ("Lease") is made by and between Legacy Health System
("Landlord") and Suburban Medical Clinic, Inc. ("Tenant") as of December 15,
1994.
This Lease is made with reference to the following facts:
A. Landlord is the owner of certain real property located at 2850
East Powell Valley Road in Gresham, Oregon. The building has approximately
18,500 square feet.
NOW, THEREFORE, the parties agree as follows:
1. PREMISES. Effective as of the first day of the term set forth in
Section 2, Landlord agrees to lease to Tenant the entire building and parking
lot the "Premises", which is described in the drawing on Exhibit A. located on
the land legally described in Exhibit B.
2. TERM. The term of this Lease shall be one-hundred twenty (120)
months commencing on the first day of February, 1995 and ending January 30,
2005.
3. RENT Tenant shall pay to Landlord as monthly rent, without
deduction, setoff, prior notice, or demand, one-twelfth of the sum of One
Hundred Twenty Nine Thousand Five Hundred Dollars ($129,500) per year for Years
One through Three; One Hundred Thirty Eight Thousand Seven Hundred Fifty Dollars
($138,750) per year for Years Four and Five; and One Hundred Forty Eight
Thousand Dollars ($148,000) per year for Years Six through Ten.
All rent shall be paid to Landlord at the address to which
notices to Landlord are to be given.
Landlord will lend Tenant up to $200,000 for tenant improvements
at an interest rate of the prime U.S. Bank interest rate plus two percentage
points. Such loan and interest to be repaid in equal monthly installments so as
to fully amortize the debt in sixty (60) months. All tenant improvements must be
completed by year two of the Lease.
4
<PAGE>
4. ADJUSTMENT TO RENT.
4.1 UTILITIES: Tenant shall pay the cost of all utilities
supplied to or used in the Premises.
4.2 REAL PROPERTY TAXES, ASSESSMENTS: Tenant shall pay all real
property taxes and assessments levied and assessed upon the Premises.
4.2.1 Tenant's share of real property taxes for the
years which this Lease commences or terminates shall be prorated based upon the
portion of the tax year that this Lease is in effect.
4.2.2 If an assessment for a public improvement is made
against the Premises, Landlord shall cause the assessment to be paid in
installments if such election is available to Landlord. Tenant shall be
obligated to reimburse Landlord for those installments accruing during Tenant's
occupancy of the Premises.
4.2.3 Tenant shall be permitted to contest the amount of
any tax so long as such contest is conducted in a manner which does not cause
any risk that Landlord's interest in the Premises will be foreclosed for non-
payment. Landlord shall cooperate in any reasonable manner with such contest by
Tenant.
5. USE. Tenant shall use the Premises for medical office and
incidental uses. Tenant agrees that it has determined to its satisfaction that
the Premises can be used for those purposes. The Premises may not be used for
any other purpose without Landlord's consent. Such consent not to be
unreasonably withheld or delayed.
Tenant's use of the Premises as provided in this Lease shall be
in accordance with the following:
5.1 Tenant shall not do, bring, or keep anything in or about the
Premises that will cause an increased premium or cancellation of any insurance
covering Premises are located.
5.2 Tenant shall not use the Premises in any manner that will
constitute waste, nuisance, or unreasonable annoyance to owners or users of
neighboring buildings.
5.3 Tenant shall not do anything on the Premises that will cause
damage to the Premises.
5
<PAGE>
5.4 Tenant shall not place upon or install in windows or other
openings any signs, symbols, drapes or other materials without approval of
Landlord. Such consent not to be unreasonably withheld or delayed.
5.5 Tenant shall not be permitted to install a 'through the
wall' or 'through the window' air conditioner.
6. REPAIRS AND MAINTENANCE
6.1 LANDLORD'S OBLIGATIONS. The following shall be the
responsibility of Landlord:
6.1.1 Repairs and maintenance of the roof and gutters,
exterior walls (including painting), bearing walls, structural members and
foundation including elevator and mechanism.
6.1.2 Repair and maintenance of exterior water, sewage,
gas, and electrical services up to the point of entry to the Premises.
6.1.3 Maintenance of the heating and air conditioning
system, and
6.1.4 Repair and maintenance of parking lot.
6.2 TENANT'S OBLIGATIONS. The following shall be the
responsibility of Tenant:
6.2.1 Repair of interior walls, ceilings, doors, and
windows, and related hardware, light fixtures, switches, and wiring and plumbing
from the point of entry to the Premises, and
6.2.2 Any repairs or alterations required under Tenant's
obligation to comply with laws and regulations as set forth in Section 5 above.
6.3 LANDLORD'S INTERFERENCE WITH TENANT. Any repairs,
replacements, alterations or other work performed by Landlord on or around the
Premises shall be done in such a way as to interfere as little as reasonably
possible with use of the Premises by Tenant. Tenant shall have no right to an
abatement of rent nor any claim against Landlord for any inconvenience or
disturbance resulting from Landlord's activities performed in conformance with
the requirement of this provision.
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6.4 REIMBURSEMENT FOR REPAIRS ASSUMED. Except in an emergency
creating an immediate risk of personal injury or property damage, neither party
may perform repairs which are the obligation of the other party and charge the
other party for the resulting expense, unless at least thirty (30) days before
work is commenced, the defaulting party is given notice in writing, outlining,
with reasonable particularity, the repairs required, and such party fails within
that time to initiate such repairs in good faith.
6.5 ACCESS TO PREMISES. With the provisions hereof by Tenant,
and for showing premises to prospective purchasers or renters, provided that
Landlord shall not unreasonably interfere with Tenant's business operation.
7. PERSONAL PROPERTY TAXES. Tenant shall pay all personal property
taxes levied against personal property located on the Premises.
8. TENANT'S PROPERTY. Furnishings, trade fixtures and equipment
installed by Tenant shall be the property of Tenant. On termination of the
Lease, Tenant shall remove any such property. Tenant shall repair or reimburse
Landlord for the cost of repairing any damage to the Premises resulting form the
installation or removal of such property.
9. IMPROVEMENTS AND ALTERATIONS BY TENANT. Tenant may, at its
expense, make such additional improvements or alterations to the Premises which
it may deem necessary or desirable so long as such alterations are constructed
in accordance with local building regulations and have been approved in advance
by the Landlord. Such approval shall not be unreasonably withheld or delayed.
Any repairs or new construction by Tenant shall be done by a licensed contractor
reasonably approved by Landlord. If requested by Landlord, Tenant will post a
bond or other security reasonably satisfactory to Landlord to protect Landlord
against liens arising from work performed for Tenant. All work performed shall
be done in a workmanlike manner and with materials (where not specifically
described in the specifications) of the quality and appearance customary in the
trade, and shall become the property of the Landlord. Landlord may require
Tenant to remove any improvements or alterations at the expiration of the term.
10. LATE CHARGE. Tenant acknowledges that late payment by Tenant to
Landlord of rent or other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which would be extremely
difficult and impractical to ascertain. Such costs include, but are not limited
to, processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any mortgage or trust deed covering the Premises;
therefore, in the event Tenant
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should fail to pay any installment of rent or any other sum due hereunder within
ten (10) days after such amount is due. Tenant shall pay to Landlord as
additional rent a late charge equal to 5% of each installment or the sum of
$25.00 per month whichever is greater.
11. LIENS. Tenant shall keep the Premises, and the property in which
the Premises are situated free from any liens arising out of any work performed,
materials furnished or obligations incurred by Tenant. If a lien is recorded,
Tenant shall, within 30 days after knowledge of the recording, secure the
discharge of the lien or deposit with the court or an appropriate entity cash or
sufficient corporate surety bond in an amount equal to one and one-half times
the amount of the lien.
12. INDEMNIFICATION. Tenant shall indemnify and save harmless the
Landlord from any and all liability, damage, expense, attorney's fees, causes of
action, suits, claims or judgements arising from injury to person or damage to
property arising out of or connected with the use, occupancy, management, or
condition of the Premises, excepting only the negligence or willful misconduct
of Landlord. Tenant shall, at its own cost and expense, defend any and all suits
which may be brought against the Landlord either alone or in conjunction with
the others upon any such above mentioned cause or claim, and shall satisfy, pay
and discharge any and all judgements that may be recovered against the Landlord
in any such action or actions in which the Landlord may be a party defendant.
13. PARKING. Lessee shall have exclusive use of the parking lot.
14. INSURANCE. Landlord will provide and maintain throughout the term
of the Lease, fire and extended coverage insurance in the amount of the full
insurable value of the Premises. Tenant assumes the risk of loss to its
furnishings, trade fixtures, equipment and supplies which shall not be insured
under the above policy. Tenant shall, at its own expense during the term of this
Lease, carry in full force and effect public liability insurance with an
insurance carrier satisfactory to Landlord, naming Landlord as an additional
insured, with limits of not less than $1,000,000.00 per person, or $1,000,000.00
pre occurrence, including property damage, insuring against any and all
liability of Tenant with respect to the Premises, including the common areas,
arising out of the maintenance, use or occupancy thereof. Such policy or
policies shall provide that the insurance shall not be cancelable or reduced
without at least thirty (30) days prior written notice to Landlord, and shall be
deemed primary and noncontributing with other insurance available to Landlord.
Tenant shall furnish Landlord with a certificate or other acceptable evidence
that such insurance is in effect. Tenant also agrees to provide and maintain
insurance to comply with Workers' Compensation and Employer's liability laws.
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Tenant, as a material part of the consideration to be rendered to
Landlord, hereby agrees to defend, indemnify and hold harmless Landlord against
any and all claims, costs and liabilities, including reasonable attorney's fees,
arising from Tenant's use of the Premises, or from the conduct of Tenant's
business, or from any activity, work or things done, permitted or suffered by
Tenant or any of Tenant's agents, contractors or employees.
15. WAIVER OF SUBROGATION. Tenant and Landlord each releases and
relieves the other and waives its entire right of recovery against the other for
loss or damage arising out of or incident to the perils covered by fire and
extended coverage, and liability insurance endorsements approved for use in
Oregon which occur in on or about the Premises, whether caused by the negligence
of either party, their agents, employers, or otherwise. Each party shall obtain
from its insurer(s) provisions permitting waiver of any claim against the other
party for loss or damage within the scope of the above insurance.
16. DESTRUCTION. In the event the Premises are destroyed or injured
by fire, earthquake or other casualty such that the cost of repair exceeds 40%
of the value of the Premises before the destruction, then Landlord may, at
Landlord's option, proceed with reasonable diligence to rebuild and restore the
Premises or such part thereof, provided that within thirty (30) days after such
destruction or injury Landlord shall in writing notify Tenant of Landlord's
intention to do so. During the period from destruction or damage until
restoration, the rent shall be abated in the same ratio as that portion of the
Premises which Landlord determines is unfit for occupancy shall bear to the
whole Premises. If Landlord shall fail to notify Tenant, then this Lease shall,
at the expiration of the time for the giving of notice a herein provide, be
deemed terminated and at an end.
17. OPTION TO PURCHASE. Tenant shall have the option to purchase the
Premises during the term of this Lease under the following terms:
17.1.1 At any time during first three years of the Lease
Tenant shall have the option to purchase the property for $1,700,000. Landlord
to provide satisfying deed and closing documents acceptable to Tenant. In years
seven through ten Tenant shall notify Landlord of its intent to purchase the
property. Landlord and Tenant shall agree to an appraiser to establish the value
of the property.
17.1.2 Sale must be approved by the Board of Directors of
Legacy Health System which may disapprove the sale for any reason. Management
will highly recommend that the Legacy Board of Directors accept this appraisal
and the selling price.
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18. CONDEMNATION. If all or part of the Premises are taken under
power of eminent domain, or sold under the threat of the exercise of said power,
this Lease shall terminate as to the part so taken as of the date the condemning
authority takes possession. If a portion of the Premises sufficient to render
the remaining Premises reasonably unsuitable for which the Tenant was then
making of the Premises, Tenant may by a written notice within 10 days after
notice of such taking (or absent such notice, within 10 days after the
condemning authority takes possession) terminate this Lease as of the date the
condemning authority takes possession. If Tenant does not so terminate, this
Lease shall remain in effect as to the portion of the Premises remaining except
that the rent shall be reduced in the proportion that the floor area taken bears
to the original total floor area; provided that if circumstances make abatement
based on floor area unreasonable, the rent shall abate by a reasonable amount to
be determined by Landlord and Tenant. Any award for the taking of all or part of
the Premises under the power of eminent domain, including payment made under
threat of the exercise of such power, shall be the property of Landlord, whether
made as compensation for diminution in value of the Leasehold or for the taking
of the fee or as severance damages; provided, that Tenant shall be entitled to
any award for loss of or damage to Tenant's trade fixtures and removable
personal property.
19. ASSIGNMENT AND SUCCESSION. Tenant shall not assign, let or sublet
this Lease, or any part thereof, without first obtaining the written consent of
Landlord. Such consent not to be unreasonably withheld or delayed. This Lease
shall not be assignable by operation of law. If Tenant is a corporation, any
transfer of this Lease from Tenant by merger, consolidation or liquidation or
any change in the ownership, or power to vote the majority of the outstanding
voting stock of Tenant, shall constitute an assignment for the purposes of this
section. Subject to the provisions above, this Lease shall be binding upon and
inure to the benefit of the parties, heirs and successors and assigns. If
Landlord consents to such sublease or assignment, any rent collected by Tenant
which exceeds the rent described in the Lease, shall be passed through to
Landlord.
20. DEFAULTS; REMEDIES.
20.1 The occurrence of any one or more of the following events
shall constitute a material default and breach of this Lease by Tenant:
20.1.1 Vacation or abandonment of the Premises.
20.1.2 Failure by Tenant to make any payment required as
and when due, where such failure shall continue for a period of ten (10) days
after written notice from Landlord.
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20.1.3 Failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease, other than the making of any
payment, where such failure shall continue for a period of 30 days after written
notice from Landlord. If the default is of such a nature that it cannot be
completely remedied within the 30 day period, this provision shall be complied
with if Tenant begins correction of the default within the 30 day period and
thereafter proceeds with reasonable diligence and in good faith to effect the
remedy as soon as practical.
20.1.4. a. The making by Tenant of any general
arrangement for the benefit of creditors;
b. The filing by or against Tenant of a petition in
bankruptcy, including reorganization or arrangement, unless, in the case of a
petition filed against Tenant, the same is dismissed within seventy-five (75)
days and;
c. The appointment of a trustee or receiver to take
possession of substantially all of Tenant's assets located at the Premises or of
Tenant's interest in this Lease.
20.2 REMEDIES. In the event of any material default or breach,
Landlord may at any time, without waiving or limiting any other right or remedy
reenter and take possession of the Premises or terminate this Lease, or pursue
any remedy allowed by law. Tenant agrees to pay Landlord the costs of recovering
possession of the Premises, the expenses of reletting, costs of remodeling,
broker's commissions, attorney fees, and any other costs or damages arising out
of Tenant's default. Landlord is entitled to recover any loss in rental value as
a result of Tenant default, including the lost rentals from the date the Tenant
defaults until the Premises are either released or should reasonably have been
released and including the lost rentals arising from a deficiency due to
reletting the Premises at a lessor rental than herein agreed to.
20.3 NOTICE BY TENANT OF DEFAULT. Tenant shall notify Landlord
promptly of any default not by its nature necessarily known to Landlord.
20.4 LANDLORD'S RIGHT TO CURE DEFAULTS. If Tenant fails to
perform any obligation under this Lease, Landlord shall have the option to do so
after thirty (30) day's written notice to Tenant. All of Landlord's expenditures
to correct the default shall be reimbursed by Tenant on Demand.
21. REMOVAL OF PROPERTY. All personal property of Tenant remaining on
the Premises after reentry or termination of this Lease shall conclusively be
deemed
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abandoned by Tenant and may be removed by Landlord. Landlord may store such
property in any reasonably secure place selected by Landlord, including but not
limited to a public warehouse, at the expense and risk of Owner thereof. Such
property shall be disposed of in accordance with the Oregon Landlord lien
statute.
22. MORTGAGES, DEEDS OF TRUST. It is understood and agreed that
Landlord may mortgage, or grant deeds of trust with respect to, the Premises or
the property of which such Premises are a part. Tenant agrees to execute, at the
request of Landlord, such reasonable certificates as may be required by a
mortgage or trust deed beneficiary stating that the Lease is in full force and
effect and the dates which the rent and charges have been paid. Upon a
foreclosure and a demand by Landlord's successor, Tenant shall attorn to and
recognize such successor as Landlord under this Lease.
23. NOTICES. All notices under this Lease shall be in writing and
shall be effective when mailed by certified mail or delivered to Landlord at its
address shown above, to Tenant at the Premises or to such other addresses as may
hereafter be designated by notice.
24. AMENDMENT. All of the terms, understandings and agreements
binding upon Landlord and Tenant are herein set forth.
This Lease shall not be amended or modified except in writing
signed by both parties. Failure to exercise any right in one or more instances
shall not be construed as a waiver of the right to strict performance or as an
amendment of this Lease.
25. ATTORNEY'S FEES. In the event either party requires the services
of an attorney in connection with enforcing the terms of this Lease or in the
event suit is brought for the recovery of any rent due under this Lease or for
the breach of any covenant of condition of this Lease, or for the restitution of
said Premises to Landlord and/or eviction of Tenant during said term or after
the expiration thereof, the prevailing party will be entitled to a reasonable
sum for attorney's fees, witness fees and court costs in both trial and
appellate courts.
26. NO HOLD-OVER TENANCY. Tenant has no right to hold-over after
expiration of this Lease and shall surrender possession on the date of
termination.
27. PARAGRAPH HEADINGS. The paragraph headings of this Lease are for
convenience of reference only and have no effect on the interpretation or
construction of its terms.
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28. SEVERABILITY. The unenforceability, invalidity, or illegality of
any provision shall not render the other provisions unenforceable, invalid or
illegal.
29. HAZARDOUS MATERIALS. Tenant shall indemnify, defend and hold
Landlord harmless from and against all claims, costs, damages, penalties, fines,
expenses and liabilities, including attorney's fees and costs, arising as a
result of any Use of any Hazardous Material on the Premises, or Disposal of any
Hazardous Materials on or off the Premises by Tenant or Tenant's
representatives, agents, employees or invitees. If Landlord is ever made a party
to any action or proceeding by reasons of a matter for which Tenant is obligated
to indemnify Landlord, then Tenant, upon notice from Landlord, shall defend that
action or proceeding on behalf of Landlord, at Tenant's expense with counsel
satisfactory to Landlord. The indemnification obligations under this Section
shall survive the termination of this Lease.
IN WITNESS WHEREOF, the parties have executed this Lease the date and year
written above.
LEGACY HEALTH SYSTEM SUBURBAN MEDICAL CLINIC,
an Oregon Nonprofit Corporation INC.
By: /s/Lowell Johnson By: /s/ John A. Calcagno, M.D.
----------------------------- -----------------------------
Its: Treasurer Its:
--------------------------- ---------------------------
By: By:
----------------------------- -----------------------------
Its: Its:
---------------------------- ----------------------------
Date: Date:
--------------------------- ---------------------------
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OFFICE LEASE
This lease, made and entered into at Portland, Oregon, this 30th day of
September, 1996 by and between
LANDLORD: ALBERS MILL BUILDING PARTNERSHIP, an Oregon non-profit corporation
and
TENANT: HEALTHFIRST MEDICAL GROUP, P.C. an Oregon corporation
Landlord hereby leases to Tenant the following: Suite 300 and 310,
comprising approximately 15,303 rentable square feet of office and clinic space
located on the third floor of the Building, outlined in red on Exhibit "A-2" and
further described in Exhibit "A-1" (Premises)
in the Albers Mill Building (Building)
at 1200 NW Front Avenue, Portland, Oregon, for a term commencing, October 1,
1996
and continuing through November 30, 1999 at a Monthly Base Rental as follows:
$20,085.00 (U.S.) money.
Rent is payable in advance on the first day of each month commencing, October 1,
1996.
Landlord and Tenant covenant and agree as follows:
1.1 Delivery of
Possession. Tenant is currently in possession of the premises.
2.1 Rent Payment. Tenant shall pay the Base Rent for the Premises and any
additional rent provided herein without deduction or offset.
Rent for any partial month during the lease term shall be
prorated to reflect the number of days during the month that
Tenant occupies the Premises. Additional rent means amount
determined under Section 21 of this lease and any other sums
payable by Tenant to Landlord under this lease. Rent not
paid when due shall bear interest at the rate of one-and-
one-half percent per month until paid. Landlord may at its
option impose a late charge of $.05 for each $1 or rent for
rent payments made more than 10 days late in lieu of interest
for the first month of delinquency, without waiving any other
remedies available for default. Failure to impose a late
charge shall not be a waiver of Landlord's rights hereunder.
3.1 Lease
Consideration. Upon execution of the lease Tenant has paid the Base Rent
for the first full month of the lease term for which rent is
payable and in addition has paid the sum of $20,085.00 as a
lease consideration. Landlord may apply the lease
consideration to pay the cost of performing any obligation
which Tenant fails to perform within the time required by
this lease, but such application by Landlord shall not be
the exclusive remedy for Tenant's default. If the lease
consideration is applied by Landlord, Tenant shall on demand
pay the sum necessary to replenish the lease consideration
to its original amount. To the extent not applied by
Landlord to cure defaults by Tenant, the lease consideration
shall be applied against the rent payable for the last month
of the term. The lease consideration shall not be
refundable.
4.1 Use. Tenant shall use the Premises as business for a medical
administration office and for no other purpose without
Landlord's written consent. In connection with its use,
Tenant shall at its expense promptly comply with all
applicable laws, ordinances, rules and regulations of any
public authority and shall not annoy, obstruct or interfere
with the rights of other tenants of the Building. Tenant
shall create no nuisance nor allow any objectionable fumes,
noise, or vibrations to be emitted from the Premises.
Tenant shall not conduct any
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activities that will increase Landlord's insurance rates for
any portion of the Building or that will in any manner
degrade or damage the reputation of the Building.
4.2 Equipment. Tenant shall install in the Premises only such office
equipment as is customary for general office use and shall
not overload the floors or electrical circuits of the
Premises or Building or alter the plumbing or wiring of the
Premises or Building. Landlord must approve in advance the
location of and manner of installing any wiring or
electrical, heat generating or communication equipment or
exceptionally heavy articles. All telecommunications
equipment, conduit, cables and wiring and any additional air
conditioning required because of heat generating equipment
or special lighting installed by Tenant shall be installed
and operated at Tenant's expense.
4.3 Signs. No signs, awnings, antennas, or other apparatus shall be
painted on or attached to the Building or anything placed on
any glass or woodwork of the Premises or positioned so as to
be visible from outside the Premises without Landlord's
written approval as to design, size location, and color.
All signs installed by Tenant shall comply with Landlord's
standards for signs and all applicable codes and all signs
and sign hardware shall be removed upon termination of this
lease with the sign location restored to its former state
unless Landlord elects to retain all or any portion thereof.
5.1 Utilities and
Services. Landlord will furnish water, electricity and elevator
service and, during the normal Building hours of 8:00 a.m.
to 6:00 p.m. Monday through Friday except holidays, will
furnish heat and air conditioning (if the Building is air
conditioned). Janitorial service will be provided in
accordance with the regular schedule of the Building, which
schedule and service may change from time to time. Tenant
shall comply with all government laws or regulations
regarding the use or reduction of use of utilities on the
Premises. Interruption of services or utilities shall not be
deemed an eviction or disturbance of Tenant's use and
possession of the Premises, render Landlord liable to Tenant
for damages, or relieve Tenant from performance of Tenant's
obligations under this lease. Landlord shall take all
reasonable steps to correct any interruptions in service.
Electrical service furnished will be 110 volts unless
different service already exists in the Premises. Tenant
shall provide its own surge protection for power furnished to
computers.
5.2 Extra Usage. If Tenant uses excessive amounts of utilities or services of
any kind because of operation outside of normal Building
hours, high demands from office machinery and equipment,
nonstandard lighting, or any other cause, Landlord may
impose a reasonable charge for supplying such extra
utilities or service, which charge shall be payable monthly
by Tenant in conjunction with rent payments. In case of
dispute over any extra charge under this paragraph, Landlord
shall designate a qualified independent engineer whose
decision shall be conclusive on both parties. Landlord and
Tenant shall each pay one-half of the cost of such
determination.
6.1 Maintenance
and Repair. Landlord shall have no liability for failure to perform
required maintenance and repair unless written notice of
such maintenance or repair is given by Tenant and Landlord
fails to commence efforts to remedy the problem in a
reasonable time and manner. Landlord shall have the right
to erect scaffolding and other apparatus necessary for the
purpose of making repairs, and Landlord shall have no
liability for interference with Tenant's use because of
repairs and installations. Tenants shall have no claim
against Landlord for any interruption or reduction of
services or interference with Tenant's occupancy, and no
such interruption or reduction shall be construed as a
constructive or other eviction of Tenant. Repair of damage
caused by negligent or intentional acts or breach of this
lease by Tenant, its employees or invitees shall be at
Tenant's expense.
6.2 Alterations. Tenant shall not make any alterations, additions, or
improvements to the Premises, change the color of the
interior, or install any wall or floor covering without
Landlord's prior written consent. Any such improvements,
alteration, wiring, cables or conduit installed by Tenant
shall at once become part of the Premises and belong to
Landlord except for removable machinery and trade fixtures,
shall at once become part of the realty and belong to
Landlord, provided that if attached trade fixtures are
removed by Tenant, any damage shall be repaired by Tenant.
Landlord may at its option require that Tenant remove any
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improvements, alterations, wiring, cables or conduit
installed by Tenant and restore the Premises to the original
condition upon termination of this lease.
6.3 Work by
Tenant and
Tenant's
Contractors. All work performed by Tenant and Tenant's contractors,
including but not limited to installation of telephone,
electrical, security, computer equipment and wiring, shall
be done in compliance with all applicable building, fire,
sanitary and safety codes, and other applicable laws,
statutes, regulations and ordinances, and Tenant and
Tenant's contractors shall secure all necessary permits for
the same.
Payment for any additional Tenant Alterations to the
Premises shall be solely the responsibility of Tenant. All
Tenant Alterations must be pre-approved by Landlord who
shall not unreasonably withhold consent. Landlord shall
have the right to approve the contractor used by Tenant for
any work in the Premise, and to post notices of
nonresponsibility in connection with work being performed by
Tenant in the Premises. Further, Tenant's work shall comply
with all requirements of the State Historic Preservation
Office and the U.S. Department of the Interior regarding
historic building rehabilitations.
7.1 Landlord's
Right to Perform
Building Renovations
and Other Tenant
Improvement Work. Tenant understands and agrees that Landlord may, at any time
or from time to time during the term of this Lease, perform
substantial renovation work or tenant improvement work in
and to the Building or the mechanical systems serving the
Building (such work may include, but need not be limited to,
the repair or replacement of the Building's exterior facade,
exterior window glass, elevators, electrical systems,
heating, air conditioning and ventilating systems, plumbing
system, other tenant spaces, common hallways, or lobby), any
of the abovementioned work may require access to the same
from within the Premises.
Tenant agrees that:
1. Landlord shall have access to the Premises at all
reasonable times, upon reasonable notice, for the purpose of
performing such work.
2. Landlord shall incur no liability to Tenant on account
of reasonable disturbances to Tenant's business at the
Premises which shall arise out of said access by Landlord or
by the performance by Landlord of the aforesaid renovation
or tenant improvement work at the Building.
3. Landlord shall use reasonable efforts (which shall not
include any obligation to employ labor at overtime rates)
to avoid disruption of Tenant's business during any such
entry upon the Premises by Landlord.
4. In the event that the renovation work performed by
Landlord prevents Tenant from using its Premises for more
than one day per occurrence, Landlord shall abate Tenants
rent on a day to day basis.
8.1 Indemnity. Tenant shall not allow any liens to attach to the Building
or Tenant's interest in the Premises as a result of its
activities. Tenant shall indemnify and defend Landlord and
its managing agents from any claim, liability, damage, or
loss occurring on the Premises, arising out of any activity
by Tenant, its agents, or invitees or resulting from
Tenant's failure to comply with any term of this lease.
Neither Landlord not its managing agent shall have any
liability to Tenant because of loss or damage to Tenant's
property or for death or bodily injury caused by the acts or
omissions of other Tenants of the Building, or by third
parties (including criminal acts).
8.2 Insurance. Tenant shall carry liability insurance with limits of not
less than One Million Dollars ($1,000,000) combined single
limit bodily injury and property damage which insurance
shall have an endorsement naming Landlord and Landlord's
managing agent, if any, as an additional insured and
covering the liability insured under
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paragraph 8.1 of this lease. Tenant shall furnish a
certificate evidencing such insurance which shall state that
the coverage shall not be canceled or materially changed
without 30 days advance notice to Landlord and Landlord's
managing agent, if any. A renewal certificate shall be
furnished at least 10 days prior to expiration of any
policy.
8.3 Personal
Property
Insurance. Tenant shall be required to insure for an amount equal to
their replacement costs all contents within the Premises
including, but not limited to any tenant improvements
constructed therein.
9.1 Fire or
Casualty "Major Damage" means damage by fire or other casualty to the
Building or the Premises which causes the Premises or any
substantial portion of the Building to be unusable, or which
will cost more than twenty-five percent (25%) of the pre-
damage value of the Building to repair, or which is not
covered by insurance. In case of major damage, Landlord may
elect to terminate this lease by notice in writing to Tenant
within 30 days after such date. If this lease is not
terminated following Major Damage, or if damage occurs which
is not Major Damage, Landlord shall promptly restore the
Premises to the condition existing just prior to the damage.
Tenant shall promptly restore all damage to tenant
improvements or alterations installed by Tenant or pay the
cost of such restoration to Landlord if Landlord elects to
do the restoration of such improvements. Rent shall be
reduced from the date of damage until the date restoration
work being performed by Landlord is substantially complete,
with the reduction to be in proportion to the area of the
Premises not useable by Tenant.
9.2 Waiver of
Subrogation. Tenant shall be responsible for insuring its personal
property and trade fixtures located on the Premises and any
alteration or tenant improvements it has made to the
Premises. Neither Landlord, its managing agent nor Tenant
shall be liable to the other for any loss or damage caused
by water damage, sprinkler leakage, or any of the risks that
are or could be covered by a standard all risk insurance
policy with an extended coverage endorsement, or for any
business interruption, and there shall be no subrogated
claim by one party's insurance carrier against the other
party arising out of any such loss.
10.1 Eminent
Domain. If a condemning authority takes title by eminent domain or
by agreement in lieu thereof to the entire Building or a
portion sufficient to render the Premises unsuitable for
Tenant's use, then either party may elect to terminate this
lease effective on the date that possession is taken by the
condemning authority. Rent shall be reduced for the
remainder of the term in an amount proportionate to the
reduction in area of the Premises caused by the taking. All
condemnation proceeds shall belong to Landlord, and Tenant
shall have no claim against Landlord or the condemnation
award because of the taking.
11.1 Assignment
and This Lease shall bind and inure to the benefit of the
Subletting. parties, their respective heirs, successors, and assigns,
provided that Tenant shall not assign its interest under
this lease or sublet all or any portion of the Premises
without first obtaining Landlord's consent in writing. This
provision shall apply to all transfers by operation of law
including but not limited to mergers and changes in control
of Tenant. No assignment shall relieve Tenant of its
obligation to pay rent or perform other obligations required
by this lease, and no consent to one assignment or
subletting shall be a consent to any further assignment or
subletting. Landlord shall not unreasonably withhold its
consent to any assignment or subletting provided the
effective rental paid by the subtenant or assignee is not
less than the current scheduled rental rate of the Building
for comparable space and the proposed Tenant is compatible
with Landlord's normal standards for the Building. If
Tenant proposes a subletting or assignment to which Landlord
is required to consent under this paragraph, Landlord shall
have the option of terminating this lease and dealing
directly with the proposed subtenant or assignee, or any
third party. If an assignment or subletting is permitted,
any cash profit, or the net value of any other consideration
received by Tenant as a result of such transaction shall be
paid to Landlord promptly following its receipt by
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Tenant. Tenant shall pay any costs incurred by Landlord
in connection with a request for assignment or subletting,
including reasonable attorneys' fees.
12.1 Default. Any of the following shall constitute a default by Tenant
under this lease:
(a) Tenant's failure to pay rent or any other charge
under this lease within 10 days after it is due, or
failure to comply with any other term or condition within
20 days following written notice from Landlord specifying
the noncompliance. If such noncompliance cannot be cured
within the 20-day period, this provision shall be
satisfied if Tenant commences correction within such period
and thereafter proceeds in good faith and with reasonable
diligence to effect compliance as soon as possible. Time
is of the essence of this lease.
(b) Tenant's insolvency, business failure or assignment
for the benefit of its creditors. Tenant's commencement
of proceedings under any provision of any bankruptcy or
insolvency law or failure to obtain dismissal of any
petition filed against it under such laws within the time
required to answer; or the appointment of a receiver for
Tenant's properties.
(c) Assignment or subletting by Tenant in violation of
paragraph 11.1
(d) Vacation or abandonment of the Premises without the
written consent of Landlord or failure to occupy the
Premises within 20 days after notice tendering possession.
12.2 Remedies for
Default. In case of default as described in paragraph 12.1,
Landlord shall have the right to the following remedies
which are intended to be cumulative and in addition to any
other remedies provided under applicable law:
(a) Landlord may at its option terminate the lease by
notice to Tenant. With or without termination, Landlord
may retake possession of the Premises and may use or relet
the Premises without accepting a surrender or waiving the
right to damages. Following such retaking of possession,
efforts by Landlord to relet the Premises shall be
sufficient if Landlord follows its usual procedures for
finding tenants for the space at rates not less than the
current rates for other comparable space in the Building.
If Landlord has other vacant space in the Building,
prospective tenants may be placed in such other space
without prejudice to Landlord's claim to damages or loss
of rentals from Tenant.
(b) Landlord may recover all damages caused by Tenant's
default which shall include an amount equal to rentals
lost because of the default, lease commissions paid for
this lease, and the unamortized cost of any tenant
improvements installed by Landlord to meet Tenant's
special requirements. Landlord may sue periodically to
recover damages as they occur throughout the lease term,
and no action for accrued damages shall bar a later action
for damages subsequently accruing. Landlord may elect in
any one action to recover accrued damages plus damages
attributable to the remaining term of the lease. Such
damages shall be measured by the difference between the
rent under this lease and the reasonable rental value of
the Premises for the remainder of the term, discounted to
the time of judgment at the prevailing interest rate on
judgments.
(c) Landlord may make any payment or perform any
obligation which Tenant has failed to perform, in which
case Landlord shall be entitled to recover from Tenant
upon demand all amounts so expended, plus interest from
the date of the expenditure at the rate of
one-and-one-half percent per month. Any such payment or
performance by Landlord shall waive Tenant's default.
13.1 Relocation. In the event that Tenant requires more space for expansion
than Landlord is able to provide in the Albers Mill
Building, then Tenant shall have the right to present
Landlord with a written ninety (90) day notice requesting
that Landlord use its best efforts to relocate Tenant in a
larger space within one of Landlord's buildings.
14.1 Surrender. On expiration or early termination of this lease Tenant
shall deliver all keys to Landlord and surrender the
Premises vacuumed, swept, and free of debris and in the
same condition as at the commencement of the term subject
only to reasonable wear from ordinary use. Tenant shall
remove all of its furnishings and trade fixtures that
remain its property and restore all damage resulting from
such removal. Failure to remove shall be an abandonment
of the property, and Landlord may dispose of it in any
manner without liability. If Tenant fails to vacate the
Premises when required, including failure to remove all
its personal property, Landlord may elect either: (i) to
treat Tenant as a tenant from month to month, subject to
the provisions of this lease except that rent shall be
one-and-one-half times the total rent being charged when
the lease term expired: or (ii) to eject Tenant from the
Premises and recover damages caused by wrongful holdover.
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15.1 Regulations. Landlord shall have the right but shall not be obligated,
to make, revise and enforce regulations or policies
consistent with this lease for the purpose of promoting
safety, health (including regulation or prohibition of
smoking), order, economy, cleanliness, and good service to
all tenants of the Building. Such regulations and
policies shall be complied with as if part of this lease.
16.1 Access. During times other than normal Building hours Tenant's
officers and employees or those having business with
Tenant may be required to identify themselves or show
passes in order to gain access to the Building. Landlord
shall have no liability for permitting or refusing to
permit access by anyone. Landlord shall have the right to
enter upon the Premises at any time by passkey or
otherwise to determine Tenant's compliance with this
lease, to perform necessary services, maintenance and
repairs or alterations to the building or the Premises, or
to show the Premises to any prospective tenant or
purchasers. Except in case of emergency such entry shall
be upon reasonable notice to Tenant and at such times and
in such manner as to minimize interference with the
reasonable business use of the Premises by Tenant.
16.2 Furniture and
Bulky Articles. Tenant shall move furniture and bulky articles in and out
of the Building or make independent use of the elevators
only at times approved by Landlord following at least 24
hours written notice to Landlord of the intended move.
Landlord will not unreasonably withhold its consent under
this paragraph.
17.1 Notices. Notices between the parties relating to this lease shall
be in writing, effective when delivered, or if mailed,
effective on the second day following mailing, postage
prepaid, to the address for the party stated in this lease
or to such other address as either party may specify by
notice to the other. Notice to Tenant may always be
delivered to the Premises. Rent shall be payable to
Landlord at the same address and in the same manner, but
shall be considered paid only when received.
18.1 Subordination. This lease shall be subject to and subordinate to any
mortgages, deeds of trust, or land sale contracts
(hereafter collectively referred to as encumbrances) now
existing against the Building. At Landlord's option this
lease shall be subject and subordinate to any future
encumbrance hereafter placed against the Building
(including the underlying land) or any modifications of
existing encumbrances, and Tenant shall execute such
documents as may reasonably be requested by Landlord or
the holder of the encumbrance to evidence this
subordination provided that the holder of said
encumbrances agrees not to disturb Tenant's possession so
long as Tenant is not in default of the Lease.
18.2 Transfer of
Building. If the Building is sold or otherwise transferred by
Landlord or any successor, Tenant shall attorn to the
purchaser or transferee and recognize it as the lessor
under this lease, and, provided the purchaser or
transferee assumes all obligations hereunder, the
transferor shall have no further liability hereunder.
18.3 Estoppels. Either party will within 10 days after notice from the
other execute, acknowledge and deliver to the other party
a certificate certifying whether or not this lease has
been modified and is in full force and effect; whether
there are any modifications or alleged breaches by the
other party; the dates to which rent has been paid in
advance, and the amount of any security deposit or prepaid
rent; and any other facts that may reasonably be
requested. Failure to deliver the certificate within the
specified time shall be conclusive upon the party of whom
the certificate was requested that the lease is in full
force and effect and has not been modified except as may
be represented by the party requesting the certificate.
If requested by the holder of any encumbrance, or any
ground lessor, Tenant will agree to give such holder or
lessor notice of an opportunity to cure any default by
Landlord under this lease.
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19.1 Attorneys'
Fees. In any litigation arising out of this lease, the
prevailing party shall be entitled to recover attorneys'
fees at trial and on appeal. If Landlord incurs
attorneys' fees because of a default by Tenant, Tenant
shall pay all such fees whether or not litigation is
filed.
20.1 Quiet
Enjoyment. Landlord warrants that so long as Tenant complies with all
terms of this lease it shall be entitled to peaceable and
undisturbed possession of the Premises free from any
eviction or disturbance by Landlord. Neither Landlord nor
its managing agent shall have any liability to Tenant for
loss or damages arising out of the acts, including
criminal acts, of other tenants of the Building or third
parties, nor any liability for any reason which exceeds
the value of its interest in the Building.
21.1 Additional
Rent: Cost-of-
Living
Adjustment. On each anniversary date of this lease, the Landlord shall
adjust the base rental in the same percentage as the
increase, if any, in the Consumer Price Index published by
the United States Department of Labor, Bureau of Labor
Statistics. The change shall be computed by comparing the
schedule entitled "U.S. City Average, All Items, All Urban
Consumers, 1982 - 84 = 100" for the latest available month
preceding the month in which the lease term commenced with
the same figure for the same month in the years for which
the adjustment is computed. All comparisons shall be made
using index figures derived from the same base period and
in no event shall this provision operate to decrease the
monthly rental for the Premises below the initial stated
monthly rental, plus property tax adjustments and
operating expense adjustments as provided in this Lease.
If the index cited above is revised or discontinued during
the term of this Lease then the index that is designated
by the Portland Metropolitan Association of Building
Owners and Managers to replace it shall be used.
22.1 Parking. Landlord shall provide forty-six (46) unassigned parking
spaces at no charge to Tenant in the parking lots located
north of the Building. In the event the parking lots
shall become unavailable, Landlord may reassign the parking
spaces to a substitute parking lot or structure located
within a two-block radius from the Building. Short term
parking for Tenant's customers, suppliers, and invitees
shall be without charge. Landlord reserves the right at
any time to promulgate rules and regulations relating to
the use of such parking areas, including reasonable
restrictions on parking by tenants and employees, to make
changes in the parking layout from time to time, and to
establish reasonable time limits on parking in visitor's
parking areas. Overnight parking is prohibited unless
authorized by Landlord and any vehicle violating this or
any other vehicle regulation adopted by Landlord is
subject to removal at owner's expense.
23.1 Restriction
on Use of Third
Floor South Patio. Landlord shall not permit tables and chairs to be placed
on the south patio adjacent to the Premises. The patio is
cross-hatched on the attached Exhibit "A-2". Landlord
will prohibit loitering on the patio by tenants and the
public and use reasonable efforts to enforce such
prohibition including the installation of "No Loitering"
signs on the patio.
24.1 Complete
Agreement. This lease and the attached Exhibits and Schedules if any,
constitute the entire agreement of the parties and
supersede all prior written and oral agreements and
representations. Neither Landlord nor Tenant is relying
on any representations other than those expressly set
forth herein.
24.2 Space Leased
as is. Unless otherwise stated in this Lease, the Premises are
leased as is in the condition now existing with no
alterations or other work to be performed by Landlord.
24.3 Captions. The titles to the paragraphs of this lease are descriptive
only and are not intended to change or influence the
meaning of any paragraph or to be part of this lease.
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24.4 Nonwaiver. Failure by Landlord to promptly enforce any regulation,
remedy or right of any kind under this Lease shall not
constitute a waiver of the same and such right or remedy
may be asserted at any time after Landlord becomes
entitled to the benefit thereof notwithstanding delay in
enforcement.
24.5 Exhibits. The following Exhibits are attached hereto and
incorporated as a part of this lease: Exhibits "A", "A-1"
and "A-2".
IN WITNESS WHEREOF, the duly authorized representatives of the parties have
executed this lease as of the day and year first written above.
LANDLORD: ALBERS MILL BUILDING PARTNERSHIP,
an Oregon non-profit corporation ADDRESS FOR NOTIFICATION
5 NW Front Avenue (Naito
Parkway)
By: H. NAITO CORPORATION Portland, Oregon 97209
an Oregon corporation, as
General Partner
By: /s/ Samuel Naito
-----------------------------------
Its: C.E.O.
TENANT: HEALTHFIRST MEDICAL GROUP, P.C., ADDRESS FOR NOTIFICATION
an Oregon corporation 1200 NW Front Avenue
(Naito Parkway)
By: /s/ Jay Nisenfeld Portland, Oregon 97209
---------------------------------------
Its: Sr. VP, Bus. Ops.
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SEAL:
STATE OF OREGON )
ss
COUNTY OF MULTNOMAH )
On this 30th day of September, 1996, personally appeared Samuel T. Naito
who, being duly sworn, did say that he is the Chief Executive Officer of H.
Naito Corporation, an Oregon corporation, and that the foregoing instrument
was signed on behalf of said corporation by authority of its Board of
Directors; and acknowledged said instrument to be the voluntary act and deed
of said corporation. Before me:
/s/ Judith Yoresen
----------------------------------------
[SEAL] Notary Public of Oregon
My Commission Expires: 4/24/97
-------
SEAL:
STATE OF OREGON )
ss
COUNTY OF MULTNOMAH )
On this 27th day of September, 1996, personally appeared Nisenfeld who,
being duly sworn, did say that he is the Senior Vice President of HealthFirst
Medical Group, P.C., an Oregon corporation, and that the foregoing instrument
was signed on behalf of said corporation by authority of its Board of
Directors; and acknowledged said instrument to be the voluntary act and deed
of said corporation. Before me:
/s/ Valerie Adams
----------------------------------------
[SEAL] Notary Public of Oregon
My Commission Expires: 2/20/2000
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EXHIBIT "A-1"
LEGAL DESCRIPTION
PARCEL I:
That portion of the following tract lying Southeasterly of the line between
Lots 15 and 16, Block 318, COUCH'S ADDITION TO THE CITY OF PORTLAND, and the
Northeasterly extension of said line: A parcel of land in Block 318, COUCH'S
ADDITION TO THE CITY OF PORTLAND, and between said block and the ordinary low
water line of the Willamette River, in the Northwest one-quarter of Section
34, Township 1 North, Range 1 East, Willamette Meridian, and in the City of
Portland, Multnomah County, Oregon, described as follows:
Beginning at an angle point on the Northeasterly right-of-way line of N.W.
Front Avenue, being a point on the Southwesterly line of Lot 5 of said Block
318; thence along said right-of-way line North 50 degrees 27 feet 00 inches
West 663.00 feet to the Southeasterly line of the Northwesterly 10.00 feet of
Lot 18; thence along said Southeasterly line North 39 degrees 33 feet 00 inches
East 15.00 feet; thence North 50 degrees 27 feet 00 inches West 300.00 feet
to the Southeasterly line of the Northwesterly 10.00 feet of Lot 24; thence
along said Southeasterly line and its Northeasterly extension North 39
degrees 33 feet 00 inches East 241.30 feet to the ordinary low water line of
the Willamette River as established in that Record of Survey recorded as C.5.
50618 at the Multnomah County Surveyor's Office; thence along and continuing
along said surveyed line South 57 degrees 00 feet 00 inches East 35.90 feet;
thence South 47 degrees 30 feet 00 inches East 70.00 feet; thence South 54
degrees 00 feet 00 inches East 47.00 feet; thence South 46 degrees 45 feet 00
inches East 110.00 feet; thence South 40 degrees 30 feet 00 inches East 95.00
feet; thence South 52 degrees 30 feet 00 inches East 130.00 feet; thence
South 42 degrees 00 feet 00 inches East 80.00 feet; thence South 55 degrees
00 feet 00 inches East 50.00 feet; thence South 37 degrees 30 feet 00 inches
East 92.00 feet; thence South 52 degrees 30 feet 00 inches East 40.00 feet;
thence South 40 degrees 00 feet 00 inches East 230.00 feet; thence South 28
degrees 00 feet 00 inches East 20.00 feet; thence South 47 degrees 00 feet 00
inches East 50.00 feet; thence South 38 degrees 00 feet 00 inches East 40.00
feet; thence South 59 degrees 00 feet 00 inches East 36.97 feet to the
Northwesterly line of the parcel occupied by the Broadway Bridge; thence
leaving said surveyed line South 31 degrees 32 feet 13 inches West along said
bridge parcel line 192.62 feet to the Northeasterly right-of-way line of N.W.
Front Avenue; thence along said right-of-way line North 39 degrees 56 feet 47
inches West 124.53 feet to the point of beginning.
PARCEL II:
All state-owned submerged land located along the left bank of the Willamette
River adjacent to Block 318, COUCH'S ADDITION to the City of Portland, in the
Northwest one-quarter of Section 34, Township 1 North, Range 1 East,
Willamette Meridian, Multnomah County, Oregon, within the following described
parcel: Beginning at a point on the Northerly right-of-way line of the
Broadway Bridge and the line of ordinary low water; thence waterward
perpendicular to the thread of the stream 42.72 feet, more or less, to the
USCE Harbor line Map WR-3-5/5 (1968); thence North 44 degrees 50 feet 09
inches West, along said harbor line, 185.59 feet, to a point; thence
shoreward along a line perpendicular to the thread of the stream 44.51 feet,
more or less, to a point on the ordinary low water line; thence upstream
along the ordinary low water line to the point of beginning.
PARCEL III:
Parts of Lots One (1) and Two (2) in Block 318 of COUCH'S ADDITION to the
City of Portland, commencing at a point in the certain line of Seventh Street
119.50 feet North 1 degrees 27 feet West from the North line of Kearney
Street, said point being the intersection of the center line of Broadway of
Elizabeth Irving's Addition to East Portland if extended South 51 degrees 32
feet West its present course; thence North 51 degrees 32 feet East along the
center line of Broadway if extended 519.31 feet to the East line of North
Front Street and the place of beginning of the tract of land to be described;
thence North 59 degrees 57 feet West along the East line of North Front
Street 35.01 feet; thence North 51 degrees 37 feet 234.88 feet to the
Westerly Harbor Line of the Willamette River; thence South 44 degrees 09 feet
East along said Harbor Line 70.34 feet; thence South 51 degrees 32 feet West
240.03 feet to the East line of North Front Street; thence North 39 degrees
57 feet West 35.01 feet to the place of beginning, all in the City of
Portland, County of Multnomah, State of Oregon.
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EXHIBIT "A-2"
ALBERS MILL
THIRD FLOOR
[GRAPHIC]
All square footages are approximate.
Rentable square footage figures are based upon an 8.9% load factor.
<PAGE>
COMMERCIAL LEASE
BETWEEN: Gateway Properties L.L.C., an Oregon limited liability company, whose
address is 10535 N.E. Glisan Street, Portland, Oregon 97220
("LANDLORD");
AND: Suburban Medical Clinic, Inc., an Oregon corporation, whose address is
10535 N.E. Glisan Street, Portland, Oregon 97220 ("TENANT").
DATED: October. 14, 1994.
LANDLORD leases to TENANT, the following described property, together with
all improvements thereon, on the terms and conditions stated below:
SECTION 1: OCCUPANCY
1.1 CONSTRUCTION OF IMPROVEMENTS. LANDLORD shall construct, at its sole
expense, an office building consisting of 26,000 square feet of leasable space
on three floors, each containing 8,667 square feet, together with an adjoining
parking lot containing not less than 86 spaces. TENANT shall be provided a
"turn-key" building in conformity with mutually agreed upon plans and
specifications.
1.2 ORIGINAL TERM. The term of this Lease shall commence on
the execution of this Agreement (the "Commencement Date") and continue for 250
consecutive months. Two weeks following the issuance of a certificate of
substantial completion of the building described in paragraph 1.1 above (the
"Completion Date"), the parties shall execute an addendum to this Lease setting
forth the Completion Date.
1.3 POSSESSION. TENANT'S right to possession and obligations under
the Lease shall commence on the Commencement Date.
1.4 RELOCATION. TENANT, at TENANT'S sole expense, shall relocate from
its existing facility located adjunct to the premises within two weeks following
issuance of the certificate of substantial completion to enable LANDLORD to
complete construction of the parking areas.
SECTION 2: RENT
2.1 BASIC RENT. Beginning on the Commencement Date, TENANT shall pay
basic rent to LANDLORD of $10,000.00 per month, and continue at such rate until
the Completion Date. Beginning on the first day of the month following the
Completion Date, TENANT shall
1 - COMMERCIAL LEASE
<PAGE>
pay basic rent to LANDLORD of $33,583.33 per month, and continue at such rate
for the next eleven consecutive months. Rent shall be adjusted annually based on
changes in the Portland SMSA Consumer Price Index with a maximum yearly increase
or decrease of three percent (3%), but at no time shall basic rent be less than
the initial basic rent set forth above. Basic rent shall be payable on the first
day of each month in advance at such place as may be designated by LANDLORD.
2.2 ADDITIONAL RENT. All taxes, insurance costs, utility charges,
repairs and maintenance and any other sum which TENANT is required to pay to
LANDLORD or third parties shall be additional rent.
SECTION 3. OPTION TO RENEW
3.1 FIRST RENEWAL OPTION. If TENANT is not then in default on this lease
or any other commercial lease between the parties hereto, TENANT shall have the
option to renew this lease for an additional term of ten (10) years, as follows:
(a) The renewal term shall commence on the first day of the
month following the expiration of the initial term and
continue for 120 consecutive months.
(b) The option may be exercised by written notice to LANDLORD
given than not less than twelve (12) months prior to the
last day of the expiring term. The giving of such notice
shall be sufficient to make the lease binding for the
renewal term without further acts of the parties provided
that TENANT pays to LANDLORD the first monthly
rental installment of the renewal term on or before its due
date.
(c) The terms and conditions of the lease for the renewal term
shall be identical with the original term except for rent.
Basic rent for the renewal term shall be in an amount
mutually agreed to by the parties, but in no event less than
the basic rent for the final year of the initial term.
(d) If the parties do not agree upon the rent within one hundred
eighty (180) days after notice of election to renew, the
rent shall be determined by arbitration as provided in
Section 18 below.
SECTION 4. USE OF THE PREMISES
4.1 PERMITTED USE. The premises shall be used for any legally permitted
general and medical office purposes and uses
2 - COMMERCIAL LEASE
<PAGE>
related thereto, but for no other purpose without the consent of LANDLORD, which
consent shall not be withheld unreasonably.
4.2 RESTRICTIONS ON USE. In connection with use of the premises, TENANT
shall:
(a) Conform to all applicable laws and regulations of any public
authority affecting the premises and the use; and will
correct at TENANT'S own expense any failure of compliance
created through TENANT'S fault or by reason of TENANT'S use.
(b) Refrain from any use which would be reasonably offensive to
other tenants or owners or users of neighboring premises or
which would tend to create a nuisance or damage the
reputation of the premises.
SECTION 5: REPAIRS AND MAINTENANCE
5.1 LANDLORD'S OBLIGATIONS. The premises are being leased in an "as is"
condition and LANDLORD shall not be liable for repairs or maintenance of the
premises or other charges, except for replacement and maintenance of the roof
and gutters, exterior walls (excluding painting), bearing walls, structural
members and foundation.
5.2 TENANT'S OBLIGATIONS. All repairs and maintenance to the property
not otherwise the responsibility of LANDLORD or covered by insurance shall be
the responsibility of the TENANT including, but not limited to, the following:
(a) Repair of sidewalks, driveways, curbs and parking areas.
(b) Repair and maintenance of water, sewage, gas and electrical
services.
(c) Repair of the heating and air conditioning system, including
ordinary maintenance.
(d) Repair of interior walls, ceilings, doors and windows and
related hardware, light fixtures, switches, and wiring and
plumbing.
(e) Maintain the exterior and interior of the premises in first
class condition.
(f) Any repairs necessitated by the negligence of TENANT, its
agents, employees, and invitees.
3 - COMMERCIAL LEASE
<PAGE>
(g) Any repairs or alterations required under TENANT'S
obligation to comply with laws and regulations as set
forth in 4.2(a) above.
5.3 REIMBURSEMENT FOR REPAIRS ASSUMED. If TENANT fails or refuses to
make repairs which are required by this Section 5, the LANDLORD may make the
repairs and charge the actual costs of repairs to TENANT. Such expenditures by
LANDLORD shall be reimbursed by TENANT on demand together with interest at the
rate of twelve percent (12%) per annum from the date of expenditure by LANDLORD.
Except in an emergency creating an immediate risk of personal injury or property
damage, LANDLORD shall not perform repairs which are the obligation of TENANT
and charge the TENANT for the resulting expense unless at least 30 days before
work is commenced the TENANT is given notice in writing outlining with
reasonable particularity the repairs required, and TENANT fails within that time
to initiate such repairs in good faith.
5.4 INSPECTION OF PREMISES. LANDLORD shall have the right to inspect the
premises at any reasonable time or times and after reasonable notice to TENANT,
to determine the necessity of repairs and/or maintenance.
SECTION 6: ALTERATIONS
6.1 ALTERATIONS PROHIBITED. TENANT shall make no improvements or
alterations on the leased premises of any kind without first obtaining
LANDLORD'S written consent, which consent shall not be unreasonably withheld.
6.2 OWNERSHIP OF ALTERATIONS. All improvements and alterations
performed on the leased premises by either LANDLORD or TENANT shall be the
property of LANDLORD when installed unless the applicable LANDLORD's consent
provides otherwise.
SECTION 7: INSURANCE
7.1 INSURANCE REQUIRED. TENANT shall keep the leased premises,
including all buildings, other improvements and landscape, insured at TENANT's
expense against fire, earthquake and other risks covered by a standard fire
insurance policy with an endorsement for extended coverage. The policy shall be
written for the full insurable value, with loss payable to LANDLORD and the
policy or a certificate of insurance shall be delivered to LANDLORD and shall
contain a stipulation providing that coverage will not be canceled or diminished
without a minimum of thirty (30) days written notice to LANDLORD. TENANT shall
bear the expense of any insurance insuring the property of TENANT on the
premises.
7.2 WAIVER OF SUBROGATION. Neither party shall be liable to the other
(or to the other's successors or assigns) for any loss or damage caused by fire
or any of the risks enumerated in a standard
4 - COMMERCIAL LEASE
<PAGE>
fire insurance policy with an extended coverage endorsement, and in the event of
insured loss neither party's insurance company shall have a subrogated claim
against the other.
SECTION 8: TAXES AND UTILITIES
8.1 REAL PROPERTY TAXES. TENANT shall pay all real property taxes levied
against the leased premises within ten (10) days after receipt of notice from
LANDLORD of the total amount of the tax due.
8.2 PERSONAL PROPERTY Taxes. TENANT shall pay as due all taxes on its
personal property located on the leased premises.
8.3 SPECIAL ASSESSMENTS. If an assessment for a public improvement is
made against the leased premises, the assessment shall be paid by TENANT, who
may elect to cause such assessment to be paid in installments. TENANT shall only
be obligated to pay such installments arising during the term of this lease,
including any renewals thereof.
8.4 CONTEST OF TAXES. TENANT shall be permitted to contest the amount of
any tax so long as such contest is conducted in a manner which does not cause
any risk that LANDLORD's interest in the leased premises will be foreclosed for
nonpayment. LANDLORD shall cooperate in any reasonable manner with such contest
by TENANT.
8.5 PRORATION OF TAXES. TENANT's share of real property taxes for the
year in which this lease commences or terminates shall be prorated based upon
the portion of the tax year that this lease is in effect.
8.6 UTILITY CHARGES. TENANT shall pay when due all charges for
electricity, gas, water, sanitary and storm sewage, garbage removal, telephone
service and any other utilities of any kind furnished to the leased premises.
SECTION 9: DAMAGE AND DESTRUCTION
9.1 PARTIAL DAMAGE. If the leased premises are partly damaged and
paragraph 9.2 below does not apply, the property shall be repaired by LANDLORD
to the condition existing prior to the damage. All insurance proceeds received
by LANDLORD resulting from the damage, less the reasonable expenses incurred by
LANDLORD (including reasonable attorney fees) to obtain said amount, shall be
used to make the repairs. In the event such proceed do not pay for all of the
necessary repairs, the balance shall be paid by TENANT immediately upon
LANDLORD'S demand. Repairs shall be accomplished with all reasonable dispatch
subject to interruptions and delays from matters beyond the control of LANDLORD.
All repairs shall be done by LANDLORD in such a way as to interfere as little as
reasonably possible with the use of the premises by
5 - COMMERCIAL LEASE
<PAGE>
TENANT. TENANT shall have no right to an abatement of rent nor any claim against
LANDLORD for any inconvenience resulting from LANDLORD's activities performed in
conformance with the requirement of this provision.
9.2 DESTRUCTION. If the leased premises are destroyed or damaged such
that the cost of repair exceeds 75 percent of the value of the structure before
the damage, TENANT may elect to terminate the lease as of the date of the damage
or destruction by notice given to the other in writing not more than 45 days
following the date of damage. In such event all rights and obligations of the
parties shall cease as of the date of termination, and TENANT shall be entitled
to the reimbursement of any prepaid amounts paid by TENANT and attributable to
the anticipated term. If TENANT does not elect to terminate, LANDLORD shall
proceed to restore the leased premises to substantially the same form as prior
to the damage or destruction up to, but not to exceed, the extent of insurance
proceeds available. Work shall be commenced as soon as reasonably possible and
thereafter shall proceed without interruption except for work stoppages on
account of labor disputes and matters not under control of LANDLORD.
9.3 RENT ABATEMENT. Rent shall be abated during the repair of any damage
to the extent the premises are untenantable.
SECTION 10: EMINENT DOMAIN
10.1 PARTIAL TAKING. If a portion of the leased premises is condemned and
paragraph 10.2 does not apply the lease shall continue on the following terms:
(a) LANDLORD shall be entitled to all of the proceeds of
condemnation, and TENANT shall have no claim against
LANDLORD as a result of the condemnation.
(b) LANDLORD shall proceed as soon as reasonably possible to
make such repairs and alterations to the premises as are
necessary to restore the remaining premises to a condition
as comparable as reasonably practicable to that existing at
the time of the condemnation.
(c) After the date on which title vests in the condemning
authority or an earlier date on which alterations or repairs
are commenced by LANDLORD to restore the balance of the
property in anticipation of taking, the rent shall he
reduced in proportion to the reduction in value of the
leased premises as an economic unit on account of the
partial taking. If the parties are unable to agree upon the
amount of the reduction of rent,
6 - COMMERCIAL LEASE
<PAGE>
the amount shall be determined by arbitration in the manner
as is provided in Section 19.
(d) If a portion of LANDLORD's property not included in the
leased premises is taken and severance damages are awarded
on account of the leased premises, or an award is made for
detriment to the leased premises as a result of activity by
a public body not involving a physical taking of any portion
of the premises, this shall be regarded as a partial
condemnation to which subparagraphs 10.1(a) and (c) apply,
and the rent shall be reduced to the extent of reduction in
rental value of the premises as though a portion had been
physically taken.
10.2 TOTAL TAKING. If a condemning authority takes all of the leased
premises or a portion sufficient to render the remaining premises reasonably
unsuitable for the use which TENANT was then making of the premises, the lease
shall terminate as of the date the title vests in the condemning authorities.
Such termination shall have the same effect as a termination under paragraph
10.1(a) above. LANDLORD shall be entitled to all of the proceeds of
condemnation, and TENANT shall have no claim against LANDLORD as a result of the
condemnation.
10.3 SALE IN LIEU OF CONDEMNATION. Sale of all or part of the leased
premises to a purchaser with the power of eminent domain in the face of a threat
or probability of the exercise of the power shall be treated for the purposes of
this Section 10 as a taking by condemnation.
10.4 NOTICE OF ACTION. If LANDLORD receives notice of a condemnation
proceeding or a threat or probability thereof or of any action in lieu thereof,
LANDLORD shall promptly provide a copy of such notice to TENANT.
SECTION 11: LIABILITY AND INDEMNITY
11.1 LIENS.
(a) Except with respect to activities for which LANDLORD may be
responsible, TENANT shall pay as due all claims for work
done on and for services rendered or material furnished to
the leased premises and shall keep the premises free from
any liens. If TENANT fails to pay any such claims or to
discharge any lien, LANDLORD may do so and collect the cost
as additional rent. Any amount so added shall bear interest
at the rate of twelve percent (12%) per annum from the date
expended by LANDLORD and shall be payable on demand. Such
7 - COMMERCIAL LEASE
<PAGE>
action by LANDLORD shall not constitute a waiver of any
right or remedy which LANDLORD may have on account of
TENANT's default.
(b) TENANT may withhold payment of any claim in connection with
a good-faith dispute over the obligation to pay, so long as
LANDLORD's property interests are not jeopardized. If a lien
is filed as a result of nonpayment, TENANT shall, within 10
days after knowledge of the filing, secure the discharge of
the lien or deposit with LANDLORD cash or sufficient
corporate surety bond or other surety satisfactory to
LANDLORD in an amount sufficient to discharge the lien plus
any costs, attorney fees, and other charges that could
accrue as a result of a foreclosure or sale under the lien.
11.2 INDEMNIFICATION. TENANT shall indemnify and defend LANDLORD from
any claim, loss, or liability arising out of or related to any activity of
TENANT on the leased premises or any condition of the leased premises in the
possession or under the control of TENANT including any such claim, loss, or
liability which may be caused or contributed to in whole or in part by
LANDLORD's own negligence or failure. LANDLORD shall have no liability to
TENANT for any loss or damage caused by third parties or by any condition of the
premises.
11.3 LIABILITY INSURANCE. Before going into possession of the premises,
TENANT shall procure and thereafter during the term of the lease shall continue
to carry the following insurance at TENANT's cost: public liability and property
damage insurance in a responsible company with limits of not less than
$1,000,000 combined limit and an overriding umbrella of $2,000,000. Such
insurance shall cover all risks arising directly or indirectly out of TENANT's
activities on or any condition of the leased premises whether or not related to
an occurrence caused or contributed to by LANDLORD's negligence, shall protect
TENANT against the claims of LANDLORD on account of the obligations assumed by
TENANT under paragraph 11.2, and shall protect LANDLORD and TENANT against
claims of third persons. Certificates evidencing such insurance and bearing
endorsements requiring 30 days' written notice to LANDLORD prior to any change
or cancellation shall be furnished to LANDLORD prior to TENANT's occupancy of
the property. LANDLORD shall be named as an additional insured on such policy
or policies.
SECTION 12: QUIET ENJOYMENT; MORTGAGE PRIORITY
12.1 LANDLORD'S WARRANTY. LANDLORD warrants that he is the owner of the
leased premises and has the right to lease the same, free of all encumbrances.
LANDLORD will defend TENANT's right to
8 - COMMERCIAL LEASE
<PAGE>
quiet enjoyment of the leased premises from the lawful claims of all persons
during the lease term and any renewals thereof.
12.2 MORTGAGE PRIORITY. This lease is and shall be prior to any mortgage
or deed of trust ("Encumbrance") recorded after the date of this lease and
affecting the premises. However, if any lender holding such an Encumbrance
requires that this lease be subordinate to the encumbrance, then TENANT agrees
that the lease shall be subordinate to the encumbrance if the holder thereof
agrees in writing with TENANT that so long as TENANT performs its obligations
under this lease no foreclosure, deed given in lieu of foreclosure, or sale
pursuant to the terms of the encumbrance, or other steps or procedures taken
under the encumbrance shall affect TENANT's rights under this lease. If the
foregoing condition is met TENANT shall execute the written agreement and any
other documents required by the holder of the encumbrance to accomplish the
purposes of this paragraph. If the premises are sold as a result of foreclosure
of any encumbrance thereon, or otherwise transferred by LANDLORD or any
successor, TENANT shall attorn to the purchaser or transferee.
12.3 ESTOPPEL CERTIFICATE. Either party will within 20 days after notice
from the other execute and deliver to the other party a certificate stating
whether or not this lease has been modified and is in full force and effect and
specifying any modifications or alleged breaches by the other party. The
certificate shall also state the amount of monthly base rent, the dates to which
rent has been paid in advance, and the amount of any specified time shall be
conclusive upon the party of whom certificate was requested that the lease is
in full force and effect and has not been modified except as may be represented
by the party requesting the certificate.
SECTION 13: ASSIGNMENT AND SUBLEASE
13.1 No part of the leased property may be assigned, mortgaged, or
subleased, nor may a right of use of any portion of the property be conferred on
any third person by any other means, without the prior written consent of
LANDLORD. No consent in one instance shall prevent the provision from applying
to a subsequent issuance. LANDLORD shall not unreasonably delay consent and
shall give consent under circumstances where withholding it shall be
unreasonable.
SECTION 14: DEFAULT
14.1 DEFAULT IN RENT. Failure of TENANT to pay any rent or other charge
within 10 days after it is due.
14.2 DEFAULT IN OTHER COVENANTS. Failure of TENANT to comply with any
term or condition or fulfill any obligation of the lease (other than the
payment of rent or other charges) within 20 days
9 - COMMERCIAL LEASE
<PAGE>
after written notice by LANDLORD specifying the nature of the default with
reasonable particularity. If the default is of such a nature that it cannot be
completely remedied within the 20-day period, this provision shall be complied
with if TENANT begins correction of the default within the 20-day period and
thereafter proceeds with reasonable diligence and in good faith to effect the
remedy as soon as practicable.
14.3 INSOLVENCY. Insolvency of TENANT; an assignment by TENANT for the
benefit of creditors; the filing by TENANT of a voluntary petition in
bankruptcy; an adjudication that TENANT is bankrupt or the appointment of a
receiver of the properties of TENANT; the filing of any involuntary petition of
bankruptcy and failure of TENANT to secure a dismissal of the petition within 30
days after filing; attachment of or the levying of execution on the leasehold
interest and failure of TENANT to secure discharge of the attachment or release
of the levy of execution within 10 days.
14.4 ABANDONMENT: Failure of TENANT for five (5) days or more to occupy
the property for the purposes permitted under this lease unless such failure is
excused under other provisions of this lease shall be an abandonment of the
property.
SECTION 15: REMEDIES ON DEFAULT
15.1 TERMINATION. In the event of a default the lease may be terminated
at the option of LANDLORD by notice in writing to TENANT. If the lease is not
terminated by election of LANDLORD or otherwise, LANDLORD shall be entitled to
recover damages from TENANT for the default. If the lease is terminated,
TENANT's liability to LANDLORD for damages shall survive such termination, and
LANDLORD may reenter, take possession of the premises, and remove any persons or
property under any rights or remedies provided by law.
15.2 RELETTING. Following reentry or abandonment, LANDLORD may relet the
premises and in that connection may make any suitable alterations or refurbish
the premises, or both, or change the character or use of the premises, but
LANDLORD shall not be required to relet for any use or purpose other than that
specified in the lease or which LANDLORD may reasonably consider injurious to
the premises, or to any tenant which LANDLORD may reasonably consider
objectionable. LANDLORD may relet all or part of the premises, alone or in
conjunction with other properties, for a term longer or shorter than the term of
this lease, upon any reasonable terms and conditions, including the granting of
some rent-free occupancy or other rent concession.
15.3 DAMAGES. In the event of termination on default LANDLORD shall be
entitled to recover immediately, without waiting until the due date of any
future rent or until the date fixed for expiration of the lease term, the
following amounts as damages:
10 - COMMERCIAL LEASE
<PAGE>
(a) The loss of reasonable rental value from the date of default
until a new tenant has been, or with the exercise of
reasonable efforts could have been, secured.
(b) The reasonable costs of reentry and reletting including
without limitation the cost of any clean up, refurbishing,
removal of TENANT's property and fixtures, or any other
expense occasioned by TENANT's failure to quit the premises
upon termination and to leave them in the required
condition, any remodeling costs, attorney fees, court costs,
broker commissions, and advertising costs.
(c) Any excess of the value of the rent and all of TENANT's
other obligations under this lease over the reasonable
expected return from the premises for the period commencing
on the earlier of the date of trial or the date the premises
are relet and continuing through the end of the term. The
present value of future amounts will be computed using a
discount rate equal to the prime loan rate of major Oregon
banks in effect on the date of trial.
15.4 RIGHT TO SUE MORE THAN ONCE. LANDLORD may sue periodically to
recover damages during the period corresponding to the remainder of the lease
term, and no action for damages shall bar a later action for damages
subsequently accruing.
15.5 REMEDIES CUMULATIVE. The foregoing remedies shall be in addition to
and shall not exclude any other remedy available to LANDLORD under applicable
law.
SECTION 16: SURRENDER AT EXPIRATION
16.1 CONDITION OF PREMISES. Upon expiration of the lease term or earlier
termination on account of default, TENANT shall deliver all keys and surrender
possession of the leased premises in good condition and broom clean. Alterations
constructed by TENANT with permission from LANDLORD shall not be removed or
restored to the original condition unless the terms of permission for the
alteration so require. TENANT's obligations under this paragraph shall be
subordinate to the provisions of Section 9 related to destruction.
16.2 FIXTURES
(a) All fixtures placed upon the leased premises during the
term, other than TENANT's trade fixtures, shall, at
LANDLORD's option, become the
11 - COMMERCIAL LEASE
<PAGE>
property of LANDLORD. If LANDLORD so elects, TENANT shall
remove any or all fixtures which would otherwise remain the
property of LANDLORD, and shall repair any physical damage
resulting from the removal. If TENANT fails to remove such
fixtures, LANDLORD may do so and charge the cost to TENANT
with interest at the legal rate from the date of
expenditure.
(b) Prior to expiration or termination of the lease term TENANT
shall remove all furnishings, furniture, and trade fixtures
which remain its property. If TENANT fails to do so, this
shall be an abandonment of the property, and LANDLORD may
retain the property and all rights of TENANT with respect to
it shall cease or, by notice in writing given to TENANT
within 20 days after removal was required, LANDLORD may
elect to hold TENANT to its obligation of removal. If
LANDLORD elects to require TENANT to remove, LANDLORD may
effect a removal and place the property in public storage
for TENANT's account. TENANT shall be liable to LANDLORD
for the cost of removal, transportation to storage, and
storage, with interest at the legal rate on all such
expenses from the date of expenditure by LANDLORD.
16.3 HOLDOVER:
(a) If TENANT does not vacate the leased premises at the time
required, LANDLORD shall have the option to treat TENANT as
a tenant from month to month, subject to all of the
provisions of this lease except the provisions for term and
renewal. Failure of TENANT to remove fixtures, furniture,
furnishings, or trade fixtures which TENANT is required to
remove under this lease shall constitute a failure to vacate
to which this paragraph shall apply if the property not
removed will substantially interfere with occupancy of the
premises by another tenant or with occupancy by LANDLORD
for any purpose including preparation for a new tenant.
(b) If a month-to-month tenancy results from a holdover by
TENANT under this paragraph 16.3, the tenancy shall be
terminable at the end of any monthly rental period on
written notice from LANDLORD given not less than 10 days
prior to the termination date which shall be specified in
the notice. TENANT waives any notice which would
12 - COMMERCIAL LEASE
<PAGE>
otherwise be provided by law with respect to a month-to-
month tenancy.
SECTION 17: MISCELLANEOUS
17.1 NONWAIVER. Waiver by either party of strict performance of any
provision of this lease shall not be a waiver of or prejudice the party's right
to require strict performance of the same provision in the future or of any
other provision.
17.2 ATTORNEY FEES. If suit or action is instituted in connection with
any controversy arising out of this lease, the prevailing party shall be
entitled to recover in addition to costs such sum as the court may adjudge
reasonable as attorney fees.
17.3 NOTICES. Any notice required or permitted under this lease shall be
given when actually delivered or 48 hours after deposited in United States mail
as certified mail addressed to the address first given in this lease or to such
other address as may be specified from time to time by either of the parties in
writing.
17.4 SUCCESSION. Subject to the above-stated limitations on transfer of
TENANT's interest, this lease shall be binding upon and inure to the benefit of
the parties, their respective successors and assigns.
17.5 LANDLORD'S RIGHT TO CURE Defaults. If TENANT fails to perform any
obligation under this lease, LANDLORD shall have the option to do so after 30
days' written notice to TENANT. All of LANDLORD's expenditures to correct the
default shall be reimbursed by TENANT on demand with interest at the rate of ^C
percent (^C%) per annum from the date of expenditure by LANDLORD.
17.6 RECORDATION. This lease shall not be recorded without the consent in
writing of LANDLORD. LANDLORD shall execute and acknowledge a memorandum of this
lease in a form suitable for recording, and TENANT may record the memorandum.
17.7 ENTRY FOR INSPECTION. LANDLORD shall have the right to enter upon
the premises at any reasonable time and after reasonable notice to determine
TENANT's compliance with this lease, and in addition shall have the right, at
any time during the last six (6) months of the term of this lease or any renewal
thereof, to place and maintain upon the premises notices for leasing or selling
of the premises.
17.8 PRORATION OF RENT. In the event of commencement or termination of
this lease at a time other than the beginning or end of one of the specified
rental periods, then the rent shall be prorated as of the date of commencement
or termination and in the event of termination for reasons other than default,
all prepaid rent shall be refunded to TENANT or paid on its account.
13 - COMMERCIAL LEASE
<PAGE>
17.9 FINANCIAL INFORMATION. Not later than 120 days after and as of each
fiscal year, TENANT shall provide to LANDLORD financial information consisting
of a Balance Sheet, Profit and Loss Statement, and Reconciliation of Capital
Accounts, each prepared and reviewed by a Certified Public Accountant. TENANT
hereby grants LANDLORD permission to provide such information to LANDLORD'S
lender. Throughout the term of this lease and any extension thereof, TENANT
agrees to maintain a net worth of not less than $750,000.00.
SECTION 18. ARBITRATION
18.1 DISPUTES TO BE ARBITRATED. If any dispute arises between the
parties, either party may request arbitration and appoint as an arbitrator an
independent real estate appraiser having knowledge of valuation of rental
properties comparable to the leased premises. The other party shall also choose
an arbitrator with such qualifications, and the two arbitrators shall choose a
third. If the choice of the second or third arbitrator is not made within 10
days of the choosing of the prior arbitrator, then either party may apply to the
presiding judge of the judicial district where the leased premises are located
to appoint the required arbitrator.
18.2 PROCEDURE FOR ARBITRATION. The arbitration shall proceed according
to the Oregon statutes governing arbitration, and the award of the arbitrators
shall have the effect therein provided. The arbitration shall take place in the
county where the leased premises are located. Costs of the arbitration shall be
shared equally by the parties, but each party shall pay its own attorney fees
incurred in connection with the arbitration.
IN WITNESS WHEREOF, the parties have executed this agreement, in duplicate,
on the day and year first set forth above.
LANDLORD: GATEWAY PROPERTIES, L.L.C.
By: /s/ John A. Calcagno, M.D.
--------------------------------
By: /s/ Matthew M. Shelley, M.D.
--------------------------------
By: /s/ Ellen Schiaffino-Purvis, M.D.
--------------------------------
TENANT: SUBURBAN MEDICAL CLINIC, INC.
By: /s/ Richard E. Cavalli, M.D.
-------------------------------
President
By: /s/ Leo J. Freiermath, M.D.
--------------------------------
Secretary
14 - COMMERCIAL LEASE
<PAGE>
ADDENDUM TO COMMERCIAL LEASE
BETWEEN: Gateway Properties L.L.C., an Oregon limited liability company,
whose address is 10535 N.E. Glisan Street, Portland, Oregon 97220
("LANDLORD");
AND: Suburban Medical Clinic, Inc., an Oregon corporation, whose address
is 10535 N.E. Glisan Street, Portland, Oregon 97220 ("TENANT").
DATED: November 15, 1995.
On October 14, 1994, LANDLORD leased to TENANT, certain real property,
together with all improvements thereon, consisting of an office building to be
constructed, at LANDLORD'S sole expense, of 26,000 square feet of leasable space
on three floors, each containing 8,667 square feet, together with an adjoining
parking lot containing not less than 86 spaces.
The parties hereby state that the real property on which the constructed
building is located at 10535 N.E. Glisan Street, Portland, Oregon 97220, and is
more fully described on Exhibit A attached hereto.
IN WITNESS WHEREOF, the parties have executed this Addendum to Commercial
Lease in duplicate, on the day and year first set forth above.
LANDLORD: GATEWAY PROPERTIES, L.L.C.
By: /s/ John A. Calcagno, M.D.
----------------------------
By: /s/ Richard E. Cavalli, M.D.
----------------------------
By: /s/ Thomas A. Firth, M.D.
----------------------------
TENANT: SUBURBAN MEDICAL CLINIC, INC.
By: /s/ Matthew M. Shelley, M.D.
----------------------------
President
By: /s/ Ellen Schiaffino-Purvis, M.D.
---------------------------------
Secretary
ADDENDUM TO COMMERCIAL LEASE
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
PARCEL I:
Lots 6,7 and 8, Block 3, PARAGON PARK, in the City of Portland, County of
Multnomah and State of Oregon.
PARCEL II:
Lot 2, JONELL, in the City of Portland, County of Multnomah and State of Oregon.
PARCEL III:
Lot 1, JONELL, in the City of Portland, County of Multnomah and State of Oregon.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
---------------------------------
LEASE AGREEMENT
---------------------------------
Dated as of
June 1, 1995
between
HEALTHCARE PARTNERS, LLC, an Oregon limited liability company
Lessor
and
THE C0RVALLIS CLINIC, P.C., an Oregon professional corporation
Lessee
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The properties affected by this Lease are located in Benton County, Oregon.
<PAGE>
TABLE OF CONTENTS
ARTICLE SUBJECT PAGE
- ------- ------- ----
1. EXHIBITS AND DEFINITIONS . . . . . . . . . . . . . . . . . . . . 1
2. TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. RENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4. TITLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5. LESSEE'S USE. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6. PARTIALLY NET LEASE; NO SETOFF. . . . . . . . . . . . . . . . . . 7
7. PROPERTY TAXES AND ASSESSMENTS . . . . . . . . . . . . . . . . . 8
8. UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
9. SIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
10. LESSEE'S REPAIR . . . . . . . . . . . . . . . . . . . . . . . . . 9
11. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . 11
12. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
13. ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
14. DAMAGE OR DESTRUCTION.. . . . . . . . . . . . . . . . . . . . . . 17
15. CONDEMNATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
16. LEASE EVENTS OF DEFAULT; REMEDIES . . . . . . . . . . . . . . . . 20
17. ATTORNEYS' FEES . . . . . . . . . . . . . . . . . . . . . . . . . 22
18. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . 23
19. TRADE FIXTURES AND PERSONAL PROPERTY. . . . . . . . . . . . . . . 28
20. MEMORANDUM OF LEASE . . . . . . . . . . . . . . . . . . . . . . . 29
21. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
22. RIGHTS OF SUCCESSORS. . . . . . . . . . . . . . . . . . . . . . . 30
23. HOLDOVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
24. SUBORDINATION AND ESTOPPEL. . . . . . . . . . . . . . . . . . . . 30
25. MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . 32
Exhibits
Exhibit A - Legal Description of the Facility Sites
Exhibit B - Basic Lease Data
Exhibit C - Memorandum of Lease
i
<PAGE>
LEASE AGREEMENT
--------------------------
THIS LEASE AGREEMENT ("Lease") is entered into effective as of the 1st day
of June, 1995, between HEALTHCARE PARTNERS, LLC, an Oregon limited liability
company ("Lessor"), and THE CORVALLIS CLINIC, P.C., an Oregon professional
corporation ("Lessee").
RECITALS
A. The Lessor is the owner of the real property described as Parcels I,
II and IV in Exhibit A to this Lease.
B. The Lessor is the lessee of the land, exclusive of improvements,
described as Parcels III, V, VI and VII in Exhibit A to this Lease, pursuant to
that certain ground lease dated June 1, 1995 ("Ground Lease"), between Good
Samaritan Hospital Corvallis, an Oregon non-profit corporation, as lessor
("Hospital") and Lessor, as lessee.
C. Pursuant to a Closing Agreement of even date, Hospital and Clinic, as
members of the Lessor, have agreed that the Lessor shall acquire ownership of
the land and improvements described as Parcels III, V, VI and VII in Exhibit A
as soon as the Hospital has completed a required land division process.
D. As to the Parcels described in paragraph B. above in which Lessor
holds only a leasehold interest ("Leased Parcels"), this Lease shall constitute
and be construed as a sublease to the Lessee. All references herein to "lease,"
"leasehold," and the like shall include the sublease to Lessee.
1. EXHIBITS AND DEFINITIONS. The following exhibits are incorporated
into and made a part of this Lease by this reference:
Exhibit A - Legal Description of the Facility Sites
Exhibit B - Basic Lease Data
Exhibit C - Memorandum of Lease
A. DEFINITIONS. The following terms used in this Lease shall have
the definitions hereinafter set forth:
1.1 "Alterations": any activity on or in the Premises which would
require a building permit;
1.2 "Business Day": Any day on which commercial banks are not
authorized or required to close in the State of Oregon.
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1.3 "Claim": Any claim or demand, by any Person, of whatsoever kind
or nature for any alleged Liabilities and Costs.
1.4 "Condemnation": Any taking, for permanent or temporary use, of
all or any part of Premises or any interest therein or right accruing thereto,
as a result of or in lieu of or in anticipation of the exercise of the right of
condemnation or eminent domain.
1.5 "Condemnation Proceeds": The proceeds of any award made to any
Person by any Governmental Authority or any deed in lieu of Condemnation, or as
a result of any judicial proceedings, in connection with any Condemnation of all
or any part of the Premises.
1.6 "Encumbrance": reservations, exceptions, encroachments,
easements, rights-of-way, covenants, conditions, restrictions, leases and other
interests affecting title to the Premises.
1.7 "Event of Loss": Any (a) loss, destruction or damage of or to any
portion of the Premises or (b) any Taking.
1.8 "Facility": The building and any other improvements located at a
Facility Site, and when used in the plural form, each of the Facilities
identified in attached Exhibit A.
1.9 "Facility Site": The land described in attached Exhibit A on
which a Facility is located, and when used in the plural form, each of the
Facilities Sites identified in attached Exhibit A.
1.10 "Indemnitees": The Mortgagees, the Lessor, and its respective
members and such members' subsidiaries, successors, assigns, agents, directors,
officers, shareholders and employees.
1.11 "Lease Commencement Date": The date on which the Lessor becomes
the owner of the Premises, or in the case of the Leased Parcels, the effective
date of the Ground Lease.
1.12 "Lease Year": The twelve (12) calendar month period commencing
on the first day of the first month following the Commencement Date (or if that
date is the first day of the month, on that date) and terminating on the day
next preceding the first anniversary of that date and each subsequent twelve
(12) calendar month period thereafter; provided, however, that if the
Commencement Date is not the first day of a month, the first Lease Year shall
include the period from the Commencement Date to the first day of the first
month following the Commencement Date.
1.13 "Lending Institution": Any commercial, national, or savings
bank, savings and loan association, trust company,
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pension trust, foundation, or insurance company, and any other entity, person,
corporation, partnership, or otherwise making a loan on the security of Lessee's
interest in this Lease or all or any part of the Improvements.
1.14 "Liabilities and Costs": All liabilities, obligations,
responsibilities, losses, damages, punitive damages, consequential damages,
treble damages, costs and expenses (including, without limitation, attorney,
expert and consulting fees and costs of investigation and feasibility studies
and environmental cleanup and ADA barrier removal costs), fines, civil or
criminal penalties and monetary sanctions, interest, direct or indirect, known
or unknown, absolute or contingent, past, present or future.
1.15 "Lien": Any interest in Property securing an obligation owed to,
or a claim by, any Person other than the owner of the Property, whether such
interest shall be based on the common law, statute or contract, whether or not
such interest shall be recorded or perfected and whether or not such interest
shall be contingent upon the occurrence of some future event or events or the
existence of some future circumstance or circumstances, and including the lien
or security interest arising from a mortgage, encumbrance, pledge, adverse claim
or charge, conditional sale or trust receipt, or from a lease, consignment or
bailment for security purposes.
1.16 "Net Proceeds": The gross proceeds constituting Insurance
Proceeds or Condemnation Proceeds less expenses reasonably and actually incurred
in the collection of such gross proceeds.
1.17 "Overdue Rate": Annual interest rate of 12%.
1.18 "Person": Any individual, corporation, limited liability
company, partnership, joint venture, association, joint stock company, trust,
estate, unincorporated organization or government (or any agency or political
subdivision thereof).
1.19 "Premises": A Facility Site, together with the Facility and, if
appropriate in the context in which it is used, all Facilities and Facility
Sites.
1.20 "Property": Any interest in any kind of property or assets,
whether real, personal or mixed, and whether tangible or intangible.
1.21 "Rent": Base Rent in the amount specified in Section 3, below,
plus any and all Supplemental Rent.
1.22 "Supplemental Rent": All amounts (other than Base Rent) which
Lessee assumes the obligation to pay or agrees to pay (whether or not
specifically denominated as "Supplemental Rent") to Lessor under this Lease, and
to the extent permitted by
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Applicable Law, interest at a rate per annum equal to the Overdue Rate on any
payment of Base Rent or Supplemental Rent not paid when due for any period for
which the same shall be overdue.
1.23 "Treasury Rate": As of the date of any determination thereof,
shall mean the rate per annum on issues of thirty (30) year United States
Treasury securities, as published by the Federal Reserve Board for release on
the first business day of the week in which such determination is made in its
Statistical Release H.15 (519) under the heading "Treasury Constant Maturities."
2. TERM.
2.1 GRANT OF LEASEHOLD. Lessor hereby leases to Lessee, and Lessee
hereby leases and takes from Lessor, the Premises for thirty (30) years (the
"Lease Term"). This Lease shall be a binding and enforceable contract on the
date it is executed on behalf of both Lessor and Lessee, but the Lease Term
shall not commence until the Commencement Date.
2.2 EXTENSION OPTIONS. Lessee shall have two options to extend the
term of this Lease for an additional consecutive period of ten Lease Years (the
"Extension Term") for each extension option, such options to be exercised by
written notice from Lessee to Lessor given not less than one hundred eighty
(180) days prior to the Expiration Date. These extension options may only be
exercised if Lessee is not in default hereunder. In the event this Lease is
terminated for any reason, the options granted to Lessee in this paragraph shall
also terminate at the same time. The leasing of the Premises during the
Extension Term shall be upon the same terms and conditions as are contained
herein with respect to the initial term, except that (1) there shall be no
further right to extend the Lease Term after the second option is exercised, and
(2) on the Commencement Date of the Extension Term and upon the fifth
anniversary of the Commencement Date of the Extension Term, the Base Rent shall
be increased by the difference if any between the then current Base Rent and the
fair market Base Rent for the Premises. The fair market Base Rent for the
Premises shall be determined by considering all relevant factors, but the value
of any referrals by Lessee of its patients to the Good Samaritan Hospital for
medical procedures shall not be a relevant factor and shall not be used to
justify any decrease in what would otherwise be the fair market Base Rent.
2.3 ADJUSTMENT OF BASE RENT. If the parties cannot agree upon the
Base Rent rate for the Extension Term then the matter shall be settled by final
and binding arbitration before a panel of three arbitrators. Each party shall
appoint one of the arbitrators and if the parties cannot agree upon a third
arbitrator then the same shall be appointed by a presiding judge of the Benton
County Circuit Court. All arbitrators shall (i) be MAI certified appraisers
experienced in the appraisal of the fair
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market rent for office buildings in the vicinity of the Premises; (ii) commit to
holding the hearing for the submission of testimony and evidence within thirty
(30) days after their appointment; and (iii) render their decision in the matter
within thirty (30) days after the hearing. The losing party shall pay all of
the costs of the arbitration and the reasonable attorneys fees of the prevailing
party incurred in the arbitration as determined by the arbitrators. Except as
otherwise provided herein, the procedures for the arbitration shall be in
accordance with the rules of the Benton County Circuit Court Arbitration
Program.
3. RENT.
3.1 BASE RENT. During the first five Lease Years of the Lease Term,
the Base Rent rate shall be One and 20/100 Dollars ($1.20) per square foot of
floor area contained in the Facilities as more particularly set forth on Exhibit
B. On every fifth anniversary of the Commencement Date, the Base Rent shall be
increased by the difference if any between the then current Base Rent and the
fair market Base Rent for the Premises determined in the same manner as provided
above in Section 2. The Base Rent shall be payable, without notice, setoff or
abatement, in twelve (12) equal monthly installments in advance on the first day
of each calendar month during the Lease Term commencing on the first day of the
first month following the Lease Commencement Date (unless the Lease Commencement
Date is the first day of the month, in which case Rent shall be payable on that
date). Base Rent and Supplemental Rent for any partial month at the beginning
or end of the Lease Term shall be prorated on a daily basis and paid by Lessee
in advance. Prior to or promptly after the Lease Commencement Date, Lessor and
Lessee agree to complete and execute Exhibit B, Basic Lease Data, establishing
significant dates and related matters.
3.2 PRORATION IN EVENT OF EARLY TERMINATION. In the event this Lease
is terminated pursuant to the express provisions of this Lease prior to the end
of the Lease Term, or during or at the end of any holdover period, Rent shall be
prorated on a daily basis to the date of termination. Lessor shall refund to
Lessee any Rent paid in advance and unearned at the time of termination and any
other sums paid by Lessee for periods beyond the date of termination (after
deduction of any amounts otherwise owed by Lessee).
3.3 PAYMENT OF SUPPLEMENTAL RENT. Any Supplemental Rent payable
hereunder shall be payable when due hereunder or, if no due date is specified,
on demand.
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4. TITLE.
4.1 WARRANTY OF TITLE. Lessor warrants to Lessee that Lessor has
good and marketable title to the Premises, except for the Leased Parcels, in
which the Lessor has a leasehold interest. Lessor has full right to make this
Lease.
4.2 COVENANT OF QUIET ENJOYMENT. So long as no breach of this Lease
exists, Lessor covenants that Lessee shall have quiet and peaceful use,
enjoyment, operation and possession of the Premises and all of the rights
granted hereunder without interference by Lessor, anyone acting by, through or
under Lessor, or anyone having title or any Lien, Encumbrance or other interest
paramount to Lessor. Lessor will comply with each of the terms of the Ground
Lease, except to the extent that Lessee is responsible for compliance under this
Lease.
5. LESSEE'S USE.
5.1 USE. Lessee may use the Premises for performing routine
procedures normally done in a multi-specialty medical clinic in Oregon or
Washington and any other medical procedures which are not a Prohibited Activity
as defined below. In order to avoid under-utilization of hospital facilities
and duplicative capital investment in health care facilities, Lessee shall not
be permitted to use the Premises for any Prohibited Activity as defined below.
A "Prohibited Activity" is any medical procedure which (i) is not normally done
in a multi-specialty medical "clinic in Oregon or Washington (ii) is the same as
or in competition with the services available at the adjacent hospital operated
by Good Samaritan Hospital, and (iii) would require a new capital investment of
$50,000 or more to commence the activity. The following are also included in
the term "Prohibited Activities": (a) any procedure requiring general
anesthesia; (b) any procedure requiring an overnight stay either as an inpatient
or as an outpatient; (c) operation of 24 hour recovery centers, labor and
delivery facilities or a newborn nursery; and (d) cardiology catheterization
laboratory services. Lessor may withhold consent in its sole and unfettered
discretion with respect to any use of the Premises other than that which is
permitted by the terms of this Section.
5.2 ARBITRATION OF USE DISPUTES. Any dispute arising under Section
5.1 shall be resolved by arbitration in the same manner as for adjustment of the
Base Rent as set forth in Section 2.3, above, except that the arbitrators shall
be licensed attorneys with extensive experience and expertise in health care law
and antitrust law. The arbitrators shall have jurisdiction to interpret the
language of the Lease and also to review and determine whether enforcement is
consistent with applicable antitrust principles. The arbitrator may not award
damages to either party under this section. If the arbitrators determines that
Lessee is using the Premises in a way contrary to Section
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5.1, lessee shall have a grace period of 45 days after the arbitrator's
determination to terminate the unauthorized use of the Premises. If the
unauthorized use has not been terminated at the end of the grace period, the
unauthorized use shall be deemed a material breach of this Lease.
5.3 COMPLIANCE WITH LAWS. Lessee, at its expense, shall duly procure
and thereafter maintain all necessary governmental approvals and submit evidence
of the same to Lessor for inspection upon request. Lessee, at its sole cost and
expense, shall at all times comply with the terms and conditions of any and all
governmental approvals and applicable laws affecting its use of the Premises.
Lessee shall at its sole cost and expense promptly comply with all requirements
of insurance bodies. Lessee shall at its sole cost and expense make any
alterations, repairs, replacements and improvements to the Premises necessitated
by applicable law or government rule or regulation and the requirements of
insurance bodies except to the extent the same would be a capital item having a
useful life exceeding the balance of the lease term in which case the cost shall
be equitably prorated. The party bearing the majority of any such expense shall
be responsible to do the work. The other party shall reimburse the party doing
any such work upon evidence of Lien free completion of the work. Lessee shall
have the right to contest the necessity and extent of any governmental approvals
and applicable laws , including the nature of necessary improvements,
alterations, repairs, or replacements to the Premises, except that Lessor need
not allow such a contest by Lessee (A) while Lessee is in default or breach of
this Lease and the default or breach is continuing, (B) if such proceedings will
involve a material danger of the sale or any risk of forfeiture or loss of, or
the creation of any Lien or Encumbrance on the Premises as to which the Tenant
has not provided adequate security to Landlord or (C) if such Claim involves the
potential imposition of criminal liability on Lessor or material civil liability
on Lessor which Lessee is not obligated to pay or which, in the reasonable
opinion of Lessor, Lessee would be unable to pay. Lessee shall not use or allow
the Premises to be used for any unlawful purpose, nor shall Lessee cause or
maintain or permit any nuisance in, on, or about the Premises. Lessee shall not
commit or allow the commission of any waste in, on, or about the Premises.
Lessee shall not do or permit anything to be done on or about the Premises or
bring or keep anything therein which will cause a cancellation of the building
insurance or otherwise adversely affect the availability of insurance in any
manner. Lessee shall be fully and completely liable to Lessor for, and shall
indemnify, defend and hold Lessor harmless from, any and all Claims, Liabilities
and Costs incurred by Lessor as a result of Lessee's failure to perform its
obligations under this Section 5 of the Lease.
6. PARTIALLY NET LEASE; NO SETOFF.
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This Lease is a net lease except for the amount (the "Base Amount") of the real
estate taxes and assessments ("Real Estate Taxes") levied against the Premises
for the fiscal year ending in the first Lease Year of the Lease Term. In
addition to the Base Rent described on Exhibit B, Lessee shall pay all costs and
expenses of every character, whether foreseen or unforeseen, ordinary or
extraordinary or structural or nonstructural, in connection with the use,
operation, maintenance, repair and reconstruction of the Premises other than the
Base Amount of Real Estate Taxes. Notwithstanding any other provision of this
Lease, it is intended that Base Rent and Supplemental Rent shall be paid without
notice, demand, counterclaim, setoff, deduction and without abatement,
suspension, deferment, diminution or reduction. The obligations and liabilities
of Lessee hereunder shall in no way be released, discharged or otherwise
affected (except as may be expressly provided herein) for any reason. Except as
otherwise expressly provided herein, Lessee shall pay to the parties
respectively entitled thereto, as Supplemental Rent, all utility charges,
increases in Real Estate Taxes over the Base Amount, personal property taxes,
insurance premiums, operating charges, repair and maintenance charges and any
other costs and expenses that may accrue or become due and payable during the
Lease Term relating to the Premises or arising from the construction,
management, maintenance, preservation or operation of, or from any use,
occupancy or activity conducted in, on or about the Premises and any machinery,
equipment or other personal property now or hereafter constituting a part of the
Premises.
7. PROPERTY TAXES AND ASSESSMENTS.
7.1 REAL ESTATE. Lessor shall pay all Real Estate Taxes to the
Benton County Tax Collectors on or before the due date. Payment may be by any
permitted installment method. Lessee shall pay Lessor Supplemental Rent
throughout the Lease Term in the amount, if any, by which the current Real
Estate Taxes exceed the Base Amount of Real Estate Taxes. Such Supplemental
Rent shall be payable monthly in advance with the Base Rent in the amount Lessor
reasonably estimates will be necessary to provide sufficient funds with which to
pay any increase over the Base Amount of Real Estate Taxes. As soon as the
actual increase is determined, Lessee shall pay Lessor any deficiency in
Supplemental Rent upon demand or credit any overpayment to the next due payment
of Rent. Any assessments for capital improvements having a useful life
extending beyond the Lease Term shall be equitably prorated so that Lessee only
pays for increases caused by such assessments to the extent of the useful life
of the capital improvement falling within the Lease Term. Real Estate Taxes
shall also include any tax, assessment, charge or fee in substitution for or in
addition to such real estate taxes or assessments, and/or a tax on rents in
substitution for or in addition to such real estate taxes or assessments, but
shall not include any income tax assessed against Lessor. Upon request made
after the Real Estate Tax
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Statement is received by Lessor each year, Lessor shall provide Lessee with
copies of the same and evidence of payment. Lessee shall have the right to
contest the amount or validity of the increases in Real Estate Taxes which
Lessee is required to pay hereunder, and for that purpose, Lessee shall have the
right to file in the name of Lessor all such protests or petitions and to
institute and prosecute such proceedings as Lessee may deem necessary for the
purpose of such contest. Lessee shall pay the cost of prosecuting such contest.
If payment is necessary in order to avoid penalties or interest accruing thereon
Lessee must pay the Supplemental Rent with respect to such Real Estate Taxes
prior to the resolution of such protest or proceeding. Any refund of any Real
Estate Taxes paid indirectly by Lessee through its Supplemental Rent shall be
the property of Lessee, and Lessor agrees to pay the same to Lessee promptly in
the event payment thereof is initially made to Lessor.
7.2 PERSONAL PROPERTY. Lessee shall pay promptly when due all
personal property taxes assessed during the Lease Term upon Lessee's fixtures,
furnishing, equipment and stock in trade or upon the Lessee's leasehold interest
under this Lease or upon any other personal property situated in or upon the
Premises.
8. UTILITIES.
Lessee agrees to pay for all water, heat, gas, electricity, garbage
collection and all other utility services consumed or used by Lessee in
connection with its occupancy of the Premises after the Lease Commencement Date.
Lessee acknowledges that Lessor shall have no responsibility to provide water,
heat, gas, electricity, garbage collection or any other utility service to be
consumed or used by Lessee in connection with its occupancy of the Premises.
9. SIGNS.
Lessee may, upon receipt of Lessor's written approval, which approval
shall not be unreasonably withheld, at its own expense erect, maintain and
illuminate signs on each Facility and elsewhere on the Premises. Any signs
installed by Lessee shall be erected and maintained at Lessee's sole cost and
expense and shall conform to all applicable rules and regulations of any
Governmental Authority and all sign criteria set forth in plans approved by
Lessor. At the termination of this Lease, all such signs, symbols and
advertising matter attached to or painted upon the exterior of each Facility
shall be removed by Lessee at its own expense. Lessee shall repair any damage
or injury to the Premises caused by the construction, maintenance or removal of
any sign. Lessor hereby grants consent for all signs existing on the Premises as
of the Commencement Date of this Lease.
10. LESSEE'S REPAIR.
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10.1 LESSEE'S MAINTENANCE AND REPAIR OBLIGATION. Lessee shall, at all
times during the Lease Term, preserve and maintain the Premises, including
parking areas, access drives, landscaping and exterior painting, in good
condition and repair. Lessee shall keep and maintain the exterior of each
Facility, including structural components, roof membrane, exterior surfaces and
all window and door glass in good condition and repair and shall keep and
maintain the interior of each Facility, including without limitation, structural
components, plumbing, heating, air conditioning and electrical equipment, in
good condition and repair during the Lease Term. Lessee agrees to maintain the
portion of the Premises that is outside each Facility in good condition and
repair, clean, and free of debris, snow and ice, properly landscaped, and
adequately lighted when each Facility is open for business. The maintenance and
operation of the Premises shall include, without limitation, all general
exterior maintenance and repairs, resurfacing, or striping, restriping,
cleaning, snow removal, sweeping and janitorial services; maintenance and repair
of sidewalks, access drives, curbs and signs, landscaping, irrigation sprinkler
systems, lighting, directional signs and other markers and bumpers, storm
drainage systems and any other utility systems. Lessee shall fulfill the
obligations under this Section 10.1 at its sole cost and expense except to the
extent of any items of a capital nature having a useful life in excess of the
Lease Term, the cost and expense of which shall be equitably prorated. In the
event such a proration results in the Lessor being responsible for a majority of
the cost and expense of any such capital items, the Lessor shall also be
responsible to do the work. The party doing the work shall have the right to be
reimbursed by the other party upon presentation of evidence of Lien free
completion of the work
10.2 REPAIRS BY LESSEE. Lessee may make such repairs to the Premises
as Lessee deems desirable, but no repairs to the Premises shall be made which
diminish the value of the Premises or impair the structural integrity of the
Facilities or materially reduce the size of the Facilities or the number of
parking spaces on the Facility Sites (except for any temporary reduction in the
size of a Facility or the number of parking spaces in connection with any such
repair). All repairs shall be performed in accordance with the provisions of
Article 13. Lessee shall not permit any Liens to be enforced against the
Premises for work done or materials furnished by or on behalf of Lessee. Lessee
may contest in good faith the validity of any such Lien by appropriate
proceedings diligently conducted so long as (a) Lessee establishes and maintains
adequate reserves in accordance with generally accepted accounting principles
with respect thereto and (b) Lessor's title to the Premises will not be
materially adversely affected thereby. Upon a final determination of the
validity of any contested Lien, Lessee shall cause the Lien to be satisfied and
released of record.
10.3 CONDITION UPON SURRENDER. Upon expiration of this Lease, Lessee
shall surrender possession of the Premises to
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Lessor in good condition, and subject to ordinary physical depreciation and wear
and tear, provided such damage was not caused by the willful misconduct of
Lessee, and provided further that in the event there is unrepaired damage by
fire or other casualty to the Premises at the time Lessee surrenders possession,
Lessee shall, at Lessor's option, either (a) restore the damage in accordance
with Section 14.1, or (b) pay to Lessor all insurance proceeds received with
respect thereto but not yet applied to the restoration of the Premises, and
assign the proceeds of all insurance policies covering such damage to Lessor.
Any such assignment of insurance proceeds shall not be construed as to limit
Lessee's obligation to repair and restore the Premises as provided for in
Section 14.1. Lessee shall surrender possession of the Facilities with operable
mechanical systems and a functioning roof membrane in good condition and repair.
11. INDEMNIFICATION
11.1 GENERALLY. Lessee shall indemnify and hold harmless the
Indemnitees from and against any and all third party claims for bodily injury
and/or property damage arising from or in connection with any accident, injury
or damage whatever even if caused by the negligence of the Indemnitees occurring
in, at or upon the Premises; together with all costs, expenses and liabilities
incurred or in connection with each such claim or action or proceeding brought
thereon, including, without limitation, all attorneys' fees and expenses at
trial and upon appeal or review. The foregoing indemnity obligation of the
Lessee shall be limited to a maximum dollar amount of liability equal to the
minimum dollar amount of liability insurance coverage required of the Lessee
under this Lease, it being intended that this Section function only as a
no-fault allocation of the risks to be covered by the Lessee's liability
insurance consistent with the provisions of Section 12 such as the additional
insured requirements and the waiver of subrogation rights. Lessee shall
maintain liability insurance that covers the Lessee's indemnification
obligations under this Lease by means of the contractual liability coverage
provisions typically found in comprehensive general liability insurance
policies.
11.2 NOTICE OF AND DEFENDING AGAINST ACTIONS. If any Indemnitee or
Lessee shall have knowledge of any Claim hereby indemnified against, such
Indemnitee or Lessee, as the case may be, shall give prompt written notice
thereof in reasonable detail describing such Claim to Lessee or such Indemnitee,
as the case may be, but (a) neither a failure by Lessee so to notify an
Indemnitee nor a failure by an Indemnitee so to notify Lessee shall relieve
Lessee from any liability which it may have to such Indemnitee, and (b) nothing
contained in this sentence shall be construed to limit the right of Lessee to
pursue any Claim it may have against such Indemnitee in a court of law or
otherwise. Lessee may, at its expense, resist and defend any action, suit or
proceeding in respect of which Lessee would be required to
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indemnify hereunder, or cause the same to be resisted and defended, by counsel
for the insurer of the liability or by counsel designated by Lessee and
reasonably approved by such Indemnitee. In the event Lessee assumes the defense
of any such action, any Indemnitee shall have the right to representation by
separate counsel in such action and participate therein, and the fees and
expenses of such counsel shall be at the expense of such Indemnitee except that
such fees and expenses shall be for the account of Lessee if (i) the
representation by such counsel has been specifically authorized by Lessee, or
(ii) the named parties to such action (including any impleaded parties) include
both such Indemnitee and Lessee and representation of such Indemnitee and Lessee
by the same counsel would be inappropriate under applicable standards of
professional conduct due to actual or potential conflicting interests between
them. Notwithstanding any of the foregoing to the contrary, Lessee shall not be
entitled to assume responsibility for and control of any such judicial or
administrative proceedings (A) while a Lease default or breach of this Lease
shall have occurred and be continuing, (B) if such proceedings will involve a
material danger of the sale or any risk of forfeiture or loss of, or the
creation of any Lien or Encumbrance on the Premises or (C) if such Claim
involves the potential imposition of criminal liability on such Indemnitee, or
material civil liability on such Indemnitee which Lessee is not obligated to pay
or which, in the reasonable opinion of such Indemnitee, Lessee would be unable
to pay. Upon the payment in full of any Claim, Liability or Costs pursuant to
this Article 11 by Lessee, Lessee shall, to the extent of such payment, be
subrogated to any right of the Indemnitee to be indemnified in respect of such
matter by any other Person. Any Claim otherwise payable by Lessee hereunder
shall be reduced by any amount received by an Indemnitee in respect of such
Claim from any other Person, and if such amounts are received by any Indemnitee
following Lessee's payment of any Claim such amounts shall be received in trust
for and paid over promptly to Lessee. Nothing in this Article 11 shall give any
right to any Person other than Lessee and the Indemnitees, including any right
of subrogation.
12. INSURANCE.
12.1 Lessee shall maintain insurance in respect of the Premises of the
following character:
(1) property insurance against all risks of direct physical
loss, including loss by fire, lightning and other risks which at the time
are included under usual and customary extended coverage endorsements in
amounts sufficient to prevent Lessor or Lessee from becoming a co-insurer of
any loss, but in any event not less than one hundred percent (100%) of the
actual replacement value of the Facilities. Any deductible amounts under
such insurance policies in excess of Fifty Thousand Dollars ($50,000) shall
be subject to the approval of Lessor;
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(2) business interruption insurance (or other insurance against
loss of rental income) sufficient to protect against loss of revenues in an
aggregate amount equal to the sum of Base Rent, the anticipated increase in
Real Estate Taxes over the Base Amount of Real Estate Taxes, insurance
premiums and any other Supplemental Rent payable under this Lease for one
year with a maximum deductible of 30 days' Rent;
(3) commercial general liability insurance against claims for
bodily injury, death or property damage occurring on, in or about the
Premises, and any claims arising out of the ownership, operation,
maintenance, condition and use of the Premises, in the minimum amount of
Two Million Dollars ($2,000,000) for each occurrence, and additional
coverage of not less than Eight Million Dollars ($8,000,000) under an
umbrella liability policy, subject to a deductible of up to Fifty Thousand
Dollars ($50,000) per occurrence, or in such greater amounts as shall be
approved by Lessor. The insurance coverage required by the preceding
sentence may be provided in a combined single limit policy in the minimum
amount of Two Million Dollars ($2,000,000);
(4) to the extent required by the law of the state in which the
Premises are located, worker's compensation insurance, including employer's
liability, disability and similar insurance as required by Oregon law;
(5) during any period of construction on any portion of the
Premises, builder's risk insurance on a completed value, nonreporting basis
for the total cost of such alterations or improvements and worker's
compensation insurance as required by applicable law. Any deductible
amounts exceeding Fifty Thousand Dollars ($50,000) under the builder's risk
policy shall be subject to the approval of Lessor.
Such insurance shall be written by companies which are rated "B VII" or above by
A.M. Best Company (or a comparable rating by any comparable successor rating
agency) and which are legally qualified to issue such insurance. If the
Premises or any part thereof shall be damaged or destroyed, and if the estimated
cost of rebuilding, replacing or repairing the same shall exceed One Hundred
Thousand Dollars ($100,000), Lessee shall promptly notify Lessor.
12.2 Every such policy shall:
(1) designate, except in the case of workers' compensation
insurance and employer liability insurance, Lessor as additional insured and
loss payee;
(2) provide (except for workers' compensation, public and
employer liability insurance) that (i) all insurance
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proceeds in excess of $5,000 per event of loss shall be payable to Lessor to be
held and, unless a Lease default or breach of this Lease shall have occurred and
be continuing, applied as provided in Article 14, (ii) insurance proceeds for
any losses (in excess of permitted deductibles) of less than One Hundred
Thousand Dollars ($100,000) shall be adjusted with Lessee provided there is no
Lease default or breach of this Lease (in which case such proceeds shall be
adjusted with Lessor), and (iii) all insurance proceeds for losses (in excess of
permitted deductibles) of One Hundred Thousand Dollars ($100,000) or more shall
be adjusted with Lessor and Lessee;
(3) provide that there shall be no recourse against Lessor for
the payment of premiums or commissions or (if such policies provide for the
payment thereof) additional premiums or assessments;
(4) provide that such insurance shall be primary insurance
without any right of contribution from any other insurance carried by Lessor,
and that all provisions thereof, except the limits of liability (which shall be
applicable to all insurers as a group) and liability for premiums (which shall
be solely a liability of Lessee), shall operate in the same manner as if there
were a separate policy covering each insured;
(5) provide that Lessor will be furnished with at least thirty
(30) days advance written notice of any material change or cancellation or
expiration or non-renewal of coverage, and that such material change,
cancellation or expiration shall not be effective as to Lessor prior to the
expiration of such period after notice to Lessor;
(6) waive any right of subrogation of the insurers thereunder
against Lessor or any other Indemnitees, and any right of the insurers to any
setoff or counterclaim or any other deduction, whether by attachment or
otherwise, with respect to any liability of any such person insured under such
policy; and
(7) provide that any losses recovered under the insurance
described in this Article 12 shall not be invalidated notwithstanding (A) any
act, failure to act or negligence or violation of warranties, declarations, or
conditions contained in such policy by any named insured or owner of the
property, (B) the occupation or use of the Premises for purposes more hazardous
than permitted by the terms thereof, (C) any foreclosure or other action or
proceeding or notice of sale relating to the property or, (D) any change in
title or ownership of the property.
12.3 Within forty-five (45) days after the end of each Fiscal Year of
Lessee, Lessee shall deliver to Lessor (i) a list prepared as of the last day of
such Fiscal Year describing all insurance maintained in accordance with this
Article 12 (and in
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particular describing risks insured against, coverage, amounts, deductibles, the
identity of insurers and expiration dates) and (ii) a certificate of a
Responsible Officer of Lessee, confirmed by an insurance certificate of the
respective insurers, to the effect that all premiums due under such policies
have been paid in full and that such insurance meets all requirements of this
Article 12.
12.4 Lessee will deliver to Lessor, promptly upon any request
therefor, (i) the originals or copies certified by the insurer of all policies
evidencing all insurance required to be maintained under this Article 12 and
(ii) evidence as to the payment of all premiums due thereon; PROVIDED that
Lessor shall not be deemed by reason of Lessor's respective custody of such
policies to have knowledge of the contents thereof. Lessee shall deliver to
Lessor a new policy or certificate evidencing such new policy as replacement for
any expiring policy at least 30 days prior to the date of such expiration.
12.5 Lessor shall have the right (but not the obligation), at its
expense, to obtain any insurance in respect of the Premises or any part thereof;
PROVIDED, HOWEVER, that such insurance shall not be for the benefit of Lessee;
and PROVIDED, FURTHER, that the insurance maintained by Lessee in accordance
with the requirements of this Article 12 shall at all times be primary.
12.6 Any separate policies of insurance obtained or carried by Lessor
pursuant to Section 12.5 above shall not be concurrent in form or contributing
in the event of loss with those required to be maintained by Lessee in
accordance with this Article 12 and shall not prejudice or reduce the proceeds
of the insurance required to be maintained by Lessee under this
Article 12.
12.7 In addition to the foregoing, if Lessee shall be in default in
respect of its obligations to obtain insurance pursuant to this Article 12,
Lessor shall have the right (but not the obligation), and without, in any way,
limiting or otherwise modifying any other rights or remedies of Lessor under
this Lease by reason of such default or otherwise, to obtain such insurance at
the expense of Lessee and, in such event, Lessee shall reimburse Lessor upon
demand for the cost thereof, together (to the extent permitted by Applicable
Law) with interest thereon at the Overdue Rate.
12.8 Lessee shall notify Lessor of any insurer (other than insurers
providing insurance on the Lease Commencement Date), each of which must be
approved by Lessor.
13. ALTERATIONS.
13.1 IMPROVEMENTS BY LESSOR. Lessor, at Lessor's expense, agrees
that Lessor will remodel the Asbury Building in
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accordance with plans and specification prepared by E. B. Architects and
identified as Construction Documents, Volume 1: Project Manual, and Volume 2:
Detail Manual, both dated July 15, 1994, together with Addendum No. 1 dated
August 3, 1994 and Addendum No. 2 dated August 26, 1994. Lessor will use its
best efforts to complete such work by January 1, 1997, subject to delays beyond
the reasonable control of Lessor.
13.2 REQUIREMENTS. Lessee shall not make or suffer to be made any
Alterations in, on, or to the Premises or any part thereof which will cost in
excess of $5,000.00 without the prior written consent of Lessor, which consent
will not be unreasonably withheld or delayed. If Lessor fails to respond within
30 days of receipt of any written request for consent to Alterations, the
Alterations shall be deemed to have been approved provided that the written
request contains a prominent warning of the date which is the deadline and that
failure to respond by such deadline will constitute deemed consent pursuant to
this Section of the Lease. Any such Alterations in, on, or to the Premises,
except for Lessee's movable furniture and equipment, shall immediately become
Lessor's property and, at the end of the term hereof, shall remain on the
Premises without compensation to Lessee. In the event Lessor consents to the
making of any such Alterations by Lessee, the same shall be made by Lessee, at
Lessee's sole cost and expense, in accordance with plans and specifications
approved by Lessor, and any contractor or person selected by Lessee to make the
same must first be approved in writing by Lessor. If the Alterations shall be
made by Lessor for Lessee's account, Lessee shall reimburse Lessor for the cost
thereof within twenty (20) days after receipt of a statement, setting forth the
actual cost of such Alterations. In any event Lessee shall pay Lessor a
reasonable administrative charge. If removal was reasonably made a condition of
the consent to the alterations, upon the expiration or sooner termination of
the Lease Term, Lessee shall, upon demand by Lessor, at Lessee's sole cost and
expense forthwith and with all due diligence, remove any or all Alterations made
by or for the account of Lessee designated by Lessor to be removed, and Lessee
shall forthwith, and with all due diligence, at its sole cost and expense,
repair and restore the Premises to their original condition, subject to ordinary
wear and tear.
13.3 PAYMENT. Lessee, at its expense, and with diligence and
dispatch, shall procure the cancellation or discharge of all notices of
violation arising from or otherwise connected with Alterations, or any other
work, labor, services or materials done for or supplied to Lessee, or any other
person claiming through or under Lessee, which shall be issued by any public
authority having or asserting jurisdiction. Lessee, at its expense, shall
procure the satisfaction or discharge of any and all mechanic's and other liens
filed in connection with Alterations, or any other work, labor, services or
materials done for or supplied by Lessee, or any person claiming through or
under Lessee, including, without limitation, security interests
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in any materials, fixtures or articles so installed in an constituting part of
the Leased Premise within fifteen (15) days after the filing thereof. Nothing
herein contained shall prevent Lessee from contesting, in good faith and at its
own expense, any notice of violation or lien provided Lessee posts for the
protection of Lessor security acceptable to Lessor. Without limitation on the
generality of the foregoing, if requested by Lessor, Lessee shall cause the
removal of any such lien by depositing with the applicable court the statutory
amount required in order to remove such lien.
14. DAMAGE OR DESTRUCTION.
14.1 DAMAGE. Lessee assumes the risk of loss or damage to the
Facilities resulting from fire or any other peril whatsoever, whether insured or
uninsured and whether partial damage or total destruction. Except as otherwise
expressly provided in this Lease, in case of damage to or destruction of the
Facilities, this Lease shall continue in effect and Lessee's obligation to pay
Base Rent and Supplemental Rent shall continue without reduction or abatement
and Lessee shall, at its sole cost and expense, as soon as is reasonably
possible and regardless of the availability of insurance proceeds, repair and
restore the Facilities substantially to the condition of the Facilities
immediately prior to such damage or destruction. If the damage or destruction
occurs when less than 5 years remains on the lease term and the damage or
destruction to a particular Facility exceeds 50% of the value of the same then
this Lease may be terminated by Lessee but only with respect to the damaged or
destroyed Facility, and in such event the insurance proceeds shall be delivered
to the Lessor. Any such termination shall be by notice given to Lessor within
30 days after the damage or destruction occurs. The notice shall contain
satisfactory evidence of the percentage of damage or destruction exceeds 50% and
shall be conditioned upon delivery of the insurance proceeds to the Lessor.
14.2 DISPOSITION OF PROCEEDS UPON AN EVENT OF LOSS. Upon any Event of
Loss, any Insurance Proceeds or any payments received at any time by Lessor or
by Lessee from any Governmental Authority or other Person (except Lessee) as a
result of the occurrence of an Event of Loss (including all Net Proceeds) shall
be either retained by Lessor or promptly paid to Lessor, as the case may be, for
application pursuant to the following provisions of Section 14.3.
14.3 DISPOSITION OF PROCEEDS FOR REPAIR. If Lessee is obligated to
repair or restore the Premises pursuant to Section 14.2 or Section 15.2, as the
case may be, upon the occurrence of any Event of Loss, all payments retained by
or made to Lessor pursuant to Section 14.2 shall be applied directly in payment
for repairs or restoration of the property in respect of which such payment was
received to the extent necessary so that the fair market sales value of each
Facility after such repair or
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replacement shall be at least equal to the fair market sales value immediately
prior to the occurrence of such Event of Loss, if not already paid for by
Lessee, or, if already paid for by Lessee, shall be applied to reimburse Lessee
for such payment. Lessor shall have no obligation to use such funds to pay for
such repair or restoration until Lessor shall have received a written request by
Lessee accompanied by Lessee's certificate showing in reasonable detail the
nature of such repair and restoration, the actual cash expenditures made to date
for such repair and restoration, the estimated cost to complete such repair and
restoration (including the payment of Rent during the period of repair) and
stating that no Lease default or breach of this Lease has occurred and is
continuing. Notwithstanding the foregoing, should the estimated cost to
complete such repair and restoration (including the Rent payable during the
period of repair) exceed the amount of the Net Proceeds available to Lessor as a
result of such Event of Loss, Lessor shall not have any obligation to make
payments to Lessee until Lessee shall have deposited with Lessor, an amount
equal to the difference between such estimated cost and the amounts available to
Lessor as a result of such Event of Loss. Lessee shall deposit such difference
with Lessor within ten (10) Business Days after Lessee receives notice or
becomes aware of such deficiency.
14.4 DEPOSIT OF PROCEEDS WITH LESSOR. Any amount referred to in
Article 14 or Article 15, which is payable to Lessee shall not be paid to Lessee
or, if it has been previously paid directly to Lessee, shall not be retained by
Lessee, but shall be paid to and held by Lessor, as security for the obligations
of Lessee under the Lease except for proceeds of $5000.00 or less.
14.5 MUTUAL RELEASE FOR INSURED DAMAGE. Lessor and Lessee hereby
release the other from any and all liability or responsibility to the other or
anyone claiming through or under them by way of subrogation for any loss or
damage to property caused by fire or any other peril covered by insurance,
regardless of origin or cause, even if such fire or other peril shall have been
caused by the fault or negligence of the other party, or anyone for whom such
party may be responsible, provided, however, that this release shall apply only
to the extent such insurance proceeds are available and only with respect to
loss or damage occurring during such time as the policies insuring the releasor
contain a waiver of subrogation clause or endorsement providing that any such
release shall not impair the policies or prejudice the right of the releasor to
recover thereunder. Lessor (to the extent Lessor maintains any insurance with
respect to the Premises) and Lessee each agrees that it shall cause its
insurance carriers to include in its policies such a waiver of subrogation
clause or endorsement.
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15. CONDEMNATION. For purposes of this Article 15, the term "Substantial
Taking" shall mean (a) the Condemnation of an entire Facility or (b) the
Condemnation of so much of a Facility or Facility Site that the following
conditions result:
(a) The remaining portion of the Facility would not be
usable by Lessee for the purpose for which the Facility was being
used immediately prior to the Condemnation, or if no Facility existed
on the Facility Site or the Facility was not being used at such time,
then for the purpose for which Lessee reasonably and in good faith
intended to use such part of the Premises; and
(b) The remaining portion of any Facility partially taken by
Condemnation cannot be repaired or reconstructed, using the condemnation
proceeds, to constitute a viable and complete Facility usable by the
Lessee in the manner described in (a) above.
15.1 PARTIAL TAKING. If during the Lease Term less than all of a
Facility shall be taken by Condemnation (and no Substantial Taking occurs), this
Lease shall not terminate but shall continue in full force and effect for the
remainder of the Lease Term then in effect with an equitable reduction in Rent.
In the event the Parties cannot agree on the reduction then the matter shall be
arbitrated in the same manner as the adjustment of Base Rent pursuant to Section
2.3, above. The term "Partial Taking" means any Condemnation that is not a
Substantial Taking. The Condemnation award for such Partial Taking shall be paid
to and held by Lessor, and applied as set forth in Section 14.3, and Lessee
shall, using the award, forthwith restore (as nearly as possible) the Premises
to substantially its condition and value prior to the Condemnation. Lessee
shall, whether or not the funds received are sufficient, pay the cost to make
needed improvements and repairs to the Premises. If the amount of such award is
not sufficient to pay the cost of all needed repairs or replacements, Lessee
shall provide the additional funds required. In the event that such Condemnation
award exceeds the cost of all needed repairs or replacement, then, the excess
award shall be payable to Lessor.
15.2 TEMPORARY TAKING. In the event of a Condemnation of all or a
portion of the Premises for a temporary use for a period of less than six months
("Temporary Taking"), this Lease and the Lease Term shall continue and the Rent
shall be paid by Lessee without reduction or abatement. Lessee shall continue
for the duration of the Temporary Taking to perform and observe all of the
covenants, agreements, terms and conditions of this Lease. Lessee shall be
entitled to receive the entire amount of any proceeds with respect to such
Temporary Taking, whether paid by way of damages, rent or otherwise; provided,
however, if the period of Temporary Taking extends beyond the Lease Term, the
proceeds or award shall be apportioned to and divided between Lessor and Lessee
as of the expiration date of the Lease Term.
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Lessee covenants that upon termination of any such Temporary Taking, if this
Lease has not expired or otherwise terminated, it will restore the Premises to
the extent possible, to the same character as existed immediately prior to such
Temporary Taking.
15.3 CONDEMNATION AWARD UPON SUBSTANTIAL TAKING. The amount of
damages resulting to Lessor and Lessee and to the respective interests of Lessor
and Lessee in the Premises by reason of Condemnation shall be separately
determined and computed by the court having jurisdiction of such Condemnation
proceedings. Separate awards and judgments shall be made with respect to the
damage to Lessor and Lessee. The awards shall be paid separately to Lessor and
Lessee in accordance with this provision. In the event Lessor's damages and
Lessee's damages, and the awards therefor, cannot, or will not, be separately
determined and computed by such court, the award granted with respect to such
Condemnation proceedings shall be divided between Lessor and Lessee as set forth
below. The Lessor's portion of the award is to compensate the Lessor for the
loss of rental and damage to or loss of the value of Lessor's right of reversion
hereunder. The Lessee's portion of the award is to compensate Lessee for damage
to or loss of the value of its leasehold estate.
16. LEASE EVENTS OF DEFAULT; REMEDIES.
16.1 LEASE EVENTS OF DEFAULTS. The following shall constitute a
breach of this Lease:
(a) Lessee shall default in the payment of Base Rent or
Supplemental Rent when due under the terms of this Lease, and such default
shall continue for a period of five (5) Business days after notice from
Lessor that the same is past due; or
(b) Lessee shall default in the due and punctual performance
of or compliance with any covenant, condition or agreement to be performed or
observed by it under any provision hereof and any such failure shall continue
unremedied for thirty (30) days after notice of the same; PROVIDED, HOWEVER,
that if any such default (excluding any default in the performance of any
provision that cannot be cured by any action on the part of Lessee) cannot be
cured with the payment of money and cannot with diligence be cured within
such notice and grace period, such period shall be extended for an additional
period, not to exceed ninety (90) days in the aggregate, as may be reasonably
necessary to cure such default, if during such additional period (i) Lessee
shall be diligently pursuing such remedy and (ii) such extension shall not
result in (A) a material risk of sale or forfeiture of the Premises, or (B) a
material risk of nonpayment of Rent; or
(c) The making by Lessee of any general assignment, or
general arrangement for the benefit of creditors; (ii) the filing by or
against Lessee of a petition to have Lessee adjudged a bankrupt or a petition
for reorganization or
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arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within thirty
(30) days; (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within thirty (30)
days; or (v) insolvency. Upon request, Lessee shall provide financial
statements to Lessor.
16.2 LESSOR'S REMEDIES. In the event of any default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default or breach:
16.2.1 Terminate Lessee's right to possession of the Premises
by any lawful means, in which case this Lease shall terminate and Lessee
shall immediately surrender possession of the Premises to Lessor. In such
event, Lessor shall be entitled to recover from Lessee all damages
incurred by Lessor by reason of Lessee's default including, but not
limited to, the cost of recovering possession of the Premises, expenses of
reletting, including necessary renovation and alteration of the Premises,
reasonable attorney's fees, and any real estate commission actually paid;
and the excess of the value of all Lessee's obligations under this Lease
from the date of default to the end of the term over the reasonable
rental value of the Premises for the same period, the net result to be
discounted to the date of default at a reasonable rate. Lessor shall use
reasonable efforts to mitigate its damages by reletting the Premises
as soon as possible after the Lessee abandons or is evicted from the
Premises.
16.2.2 Unless Lessee has abandoned the Premises, maintain
Lessee's right to possession, in which case this Lease shall continue in
effect. In such event, Lessor shall be entitled to enforce all of
Lessor's rights and remedies under this Lease, including the right to
recover the Rent as it becomes due hereunder.
16.2.3 Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the State of Oregon.
16.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails
to perform obligations required of Lessor within thirty (30) days after written
notice by Lessee to Lessor specifying wherein Lessor has failed to perform such
obligation; provided, however, that if the nature of Lessor's obligation is
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such that more than thirty (30) days are required for performance, then Lessor
shall not be in default if Lessor commences performance within such thirty (30)
day period and thereafter diligently prosecutes the same to completion.
16.4 ADDITIONAL RIGHTS OF LESSOR.
(a) If Lessee shall be in default in the observance or
performance of any term or covenant on Lessee's part to be observed or
performed under any of the provisions of this Lease then, without thereby
waiving such default, Lessor may, but shall be under no obligation to, take
all action, including, without limitation, entry upon the Premises, to
perform the obligation of Lessee hereunder immediately and without notice in
the case of any emergency or failure to provide insurance and upon five (5)
days notice to Lessee in other cases. All reasonable expenses incurred by
Lessor in connection therewith, including, without limitation, attorneys'
fees and expenses (including, without limitation, those incurred in
connection with any appellate proceedings) shall constitute Supplemental Rent
and shall be paid by Lessee to Lessor upon demand.
(b) If Lessee shall be in default in the performance of any of
its obligation hereunder, Lessee shall pay to Lessor on demand, all
reasonable expenses incurred by Lessor as a result thereof, including,
without limitation, reasonable attorneys' fees and expenses (including,
without limitation, those incurred in connection with any appellate or review
proceedings).
(c) If Lessee shall fail to pay when due any Base Rent or
Supplemental Rent, Lessor shall be entitled to collect from Lessee as
Supplemental Rent, and Lessee shall pay to Lessor, in addition to such Base
Rent and Supplemental Rent, interest accrued on such amounts from the
respective dates on which any such amounts became due and payable at the
Overdue Rate.
16.5 MASTER LEASE. This Lease Agreement represents a Master Lease
covering multiple Facilities and Facility Sites. Each provision of this Lease
shall apply to any Facility or Facility Site individually and to the entire
Premises. Any Lease default or breach of this Lease shall grant Lessor all of
the rights and remedies granted in this Lease, including without limitation, the
remedies set forth in this Article 16 with respect to all or any part of the
Premises without limitation, notwithstanding the fact that such Lease default or
breach of this Lease may pertain to less than all of the Facilities or Facility
Sites which make up the Premises.
17. ATTORNEYS' FEES.
If either party to this Lease is required to initiate or defend
litigation or arbitration in any way connected with this Lease, the prevailing
party in such litigation in addition to any other relief which may be granted,
shall be entitled to an
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award of reasonable attorneys' fees. If either party to this Lease is required
to initiate or defend litigation or arbitration with a third party as the result
of the violation of any term or provision of this Lease by the other party to
this Lease, then the party so litigating or arbitrating shall be entitled to
reasonable attorneys' fees from the other party to this Lease. Attorneys' fees
shall include attorneys' fees on any appeal or review, and in addition a party
entitled to attorneys' fees shall be entitled to all other reasonable and
necessary costs incurred in such litigation or arbitration. All such fees shall
be deemed to have accrued when incurred and shall be enforceable whether or not
such action is prosecuted to judgment. Venue of any such action shall be Benton
County, Oregon.
18. ASSIGNMENT AND SUBLETTING.
18.1 Lessee shall not sell, assign, sublet or otherwise transfer by
operation of law or otherwise this Lease or any interest herein, or the Premises
or any portion thereof, without the prior written consent of Lessor nor shall
Lessee permit any lien to be placed on the Lessee's interest by operation of
law. Any change in effective control of a corporation, partnership or other
artificial entity which is the Lessee shall be deemed a transfer of this Lease.
Any transfer hereunder by Lessee shall not result in Lessee being released or
discharged from any liability under this Lease, such liability to be
unconditional irrespective of any circumstances whatsoever which might
constitute a legal or equitable discharge or defense of a surety or guarantor,
and Lessee hereby waives any rights it may now have or hereafter acquire to
avoid any such obligations by reason of any transfer or any circumstances
arising from any transfer. Any sale, assignment, encumbrance, subletting,
occupation, lien or other transfer of this Lease which does not comply with the
provisions of Article 18 of this Lease shall be void.
18.2 Lessee shall, by written notice, advise Lessor of its desire from
and after a stated date (which shall not be less than thirty (30) days nor more
than ninety (90) days after the date of Lessee's notice) to transfer its
interest in the Premises or any portion thereof for any part of the term hereof;
and such notice by Lessee shall state the name and address of the proposed
transferee, and Lessee shall deliver to Lessor a true and complete copy of the
proposed transfer instrument with the notice. Any sublease of the Premises
shall be expressly subject and subordinate to all the terms and conditions of
this Lease (including without limitation, the rights of Lessor to enforce the
remedies contained in this Lease) and be satisfactory to Lessor in form and
content.
18.3 Lessor shall not unreasonably withhold or delay its consent to
any proposed transfer of Lessee's interest in the Premises, but Lessee
acknowledges that Lessor has entered into this Lease of the Premises on the
condition that the Premises be used for the practice of medicine as required and
limited by the
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terms and provisions of Section 5 of this Lease, and a change of use would be
reason to withhold such consent. If Lessor fails to respond within 30 days of
receipt of any written request for consent to transfer, the transfer shall be
deemed to have been approved provided that the written request contains a
prominent warning of the date which is the deadline and that failure to respond
by such deadline will constitute deemed consent pursuant to this Section of the
Lease.
18.4 Lessee agrees to indemnify against, and hold Lessor harmless
from, any and all reasonable out-of-pocket attorneys' fees, expenses, claims,
demands and liabilities, of whatever nature, relating to or in any way arising
out of any such proposed or actual Transfer.
18.5 Lessor may assign its interest under this Lease. If Lessor
assigns its interest under this Lease together with fee title to the Premises,
Lessor shall be relieved of any and all future obligations and liabilities under
this Lease accruing from and after the date of such conveyance, and Lessee shall
deliver to Lessor a written release so stating, provided that any assignee or
successor of Lessor shall provide Lessee with a written assumption agreement for
the benefit of Lessee and Lessor whereby such assignee or successor assumes and
agrees to punctually perform all of the obligations and liabilities of Lessor.
18.6 Lessee shall have the right, in addition to any other rights
granted and without any requirement to obtain Lessor's consent, to mortgage or
grant a security interest in Lessee's interest in this Lease, the Premises, the
Facilities and any subleases, under one or more leasehold mortgages to one or
more Lending Institutions, as defined, and/or under one or more purchase money
leasehold mortgages, and to assign this Lease and any subleases as collateral
security for such leasehold mortgages on the condition that all rights acquired
under such leasehold mortgages shall be subject to each and all of the
covenants, conditions, and restrictions set forth in this Lease and to all
rights and interests of Lessor, none of which covenants, conditions,
restrictions, rights, or interests is or shall be waived by Lessor by reason of
the right given to mortgage or grant a security interest in Lessee's interest in
this Lease, the Premises, the Facilities and any subleases, except as expressly
provided otherwise.
18.7 Any mortgage made pursuant to this section is referred to as a
"Permitted Leasehold Mortgage," and the holder of or secured party under a
Permitted Leasehold Mortgage is referred to as a "Permitted Leasehold
Mortgagee." The Permitted Leasehold Mortgage that is prior in lien or interest
among those in effect is referred to as the "First Leasehold Mortgage," and the
holder of or secured party under the First Leasehold Mortgage is referred to as
the "First Leasehold Mortgagee." For the purposes of any rights created under
this section, any so-called
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wraparound lender shall be considered a First Leasehold Mortgagee. If a First
Leasehold Mortgage and a Permitted Leasehold Mortgage that is second in priority
in lien or interest among those in effect are both held by the same Permitted
Leasehold Mortgagee, the two Permitted Leasehold Mortgages are collectively
referred to as the "First Leasehold Mortgage." A "Permitted Leasehold Mortgage"
includes, without limitation, mortgages and trust deeds as well as financing
statements, security agreements, and other documentation that the lender may
require.
18.8 If a Permitted Leasehold Mortgagee sends to Lessor a true copy
of its leasehold mortgage, together with written notice specifying the name and
address of the Permitted Leasehold Mortgagee, then as long as such Permitted
Leasehold Mortgage remains unsatisfied of record or until written notice of
satisfaction is given by the holder to Lessor, the following provisions shall
apply (in respect of such Permitted Leasehold Mortgage and of any other
Permitted Leasehold Mortgages):
18.8.1 Except as expressly provided otherwise below, there shall be
no cancellation, termination, surrender, acceptance of surrender, amendment, or
modification of this Lease without in each case the prior consent in writing of
the Permitted Leasehold Mortgagee. Nor shall any merger result from the
acquisition by, or devolution upon, any one entity of the fee and the leasehold
estates in the Premises.
18.8.2 Lessor shall, upon serving Lessee with any notice, whether of
default or any other matter, simultaneously serve a copy of such notice on the
Permitted Leasehold Mortgagee, and no such notice to Lessee shall be deemed
given unless a copy is so served on the Permitted Leasehold Mortgagee in the
manner provided in this Lease for giving notices.
18.8.3 In the event of any default by Lessee under this Lease, each
Permitted Leasehold Mortgagee has the same period as Lessee has, plus 30 days,
after service of notice on it of such default, to remedy or cause to be remedied
or commence to remedy and complete the remedy of the default complained of for
such default, and Lessor shall accept such performance by or at the instigation
of such Permitted Leasehold Mortgagee as if the same had been done by Lessee.
Each notice of default given by Lessor will state the amounts of whatever Rent
are then claimed to be in default.
18.8.4 If Lessor elects to terminate this Lease by reason of any
default of Lessee, the Permitted Leasehold Mortgagee, in addition to the rights
granted under the preceding Section, shall also have the right to postpone and
extend the specified date for the termination of this Lease as fixed by Lessor
in its notice of termination, for a period of six months, provided that the
Permitted Leasehold Mortgagee shall cure or cause to be cured any then-existing
defaults in payment of Rent
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and meanwhile pay the Rent, and provided further that the Permitted Leasehold
Mortgagee shall forthwith take steps to acquire or sell Lessee's interest in
this Lease by foreclosure of the Permitted Leasehold Mortgage or otherwise and
shall prosecute the same to completion with all due diligence. If, at the end
of the six-month period, the Permitted Leasehold Mortgagee is actively engaged
in steps to acquire or sell Lessee's interest, the time of the Permitted
Leasehold Mortgagee to comply with the provisions of this Section 18 shall be
extended for such period as is reasonably necessary to complete such steps with
reasonable diligence and continuity.
18.8.5 Lessor agrees that the name of the Permitted Leasehold
Mortgagee may be added to the "Loss Payable Endorsement" of any and all
insurance policies required to be carried by Lessee or Lessor.
18.8.6 Lessor agrees that in the event of termination of this Lease
by reason of any default by Lessee, Lessor will enter into a new lease of the
Premises with the Permitted Leasehold Mortgagee or its nominee, for the
remainder of the Term, effective on the date of such termination, at the Rent
and on the terms, provisions, covenants, and agreements contained in this Lease
and subject only to the same conditions of title as this Lease is subject to on
the date this Lease is executed, and to the rights, if any, of any parties then
in possession of any part of the Premises, provided:
A. The Permitted Leasehold Mortgagee or its nominee shall make
written request on Lessor for such new lease within 15 days after the date of
termination indicated in the notice of termination given to Permitted Leasehold
Mortgagee and such written request shall be accompanied by payment to Lessor of
Rent then due to Lessor under this Lease.
B. The Permitted Leasehold Mortgagee or its nominee shall pay to
Lessor, at the time the new lease is executed and delivered, any and all Rent
that would be due at the time of the execution and delivery of the new lease
pursuant to this Lease but for such termination, and in addition any expenses,
including reasonable attorney fees, to which Lessor shall have been subjected by
reason of such default.
C. The Permitted Leasehold Mortgagee or its nominee shall perform and
observe all covenants contained in this Lease on Lessee's part to be performed
and further shall remedy any other conditions that Lessee under the terminated
Lease was obligated to perform; and on execution and delivery of such new lease,
any subleases that may have been assigned and transferred previously by Lessee
to Lessor, as security under this Lease, shall then be held by Lessor as
security for the performance of all the obligations of lessee under the new
lease.
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D. Lessor shall not warrant possession of the Premises or the
Improvements to lessee under the new lease.
E. Such new lease shall be expressly made subject to the rights, if
any, of Lessee under the terminated Lease.
F. The lessee under such new lease shall have the same right, title,
and interest in and to the Improvements on the Premises as Lessee had under the
terminated Lease.
18.8.7 Nothing contained in this Lease requires the Permitted
Leasehold Mortgagee or its nominee to cure any default that occurs as a result
of the status of Lessee, such as Lessee's bankruptcy or insolvency, or to
discharge any lien, charge, or encumbrance against Lessee's interest in this
Lease junior in priority to the lien of the Permitted Leasehold Mortgage.
18.8.8 Lessor agrees to amend this Lease from time to time to the
extent reasonably requested by a Lending Institution proposing to make Lessee a
loan secured by a Permitted Leasehold Mortgage, provided that such proposed
amendments do not materially and adversely affect the right of Lessor or
Lessor's interest in the Premises. All reasonable expenses incurred by Lessor
in connection with any such amendment shall be paid by Lessee.
18.8.9 The First Leasehold Mortgagee shall be given notice of any
arbitration or other proceeding or dispute by or between the parties and shall
have the right to intervene and be made a party to any such arbitration or other
proceeding. In any event, each Permitted Leasehold Mortgagee shall receive
notice of, and a copy of, any award or decision made in the arbitration or other
proceeding.
18.8.10 Any award or payment in condemnation or eminent domain in
respect of the Premises or Improvements shall be paid to the First Leasehold
Mortgagee for the benefit of the parties and applied in the manner specified in
this Lease.
18.8.11 No fire or casualty loss claims shall be settled and no
agreement will be made in respect of any award or payment in condemnation or
eminent domain without in each case the prior written consent of the First
Leasehold Mortgagee.
18.8.12 No liability for the payment of Rent or the performance of
any of Lessee's covenants and agreements shall attach to or be imposed on the
Permitted Leasehold Mortgagee (other than any obligations assumed by the
Permitted Leasehold Mortgagee), all such liability (other than any obligations
assumed by the Permitted Leasehold Mortgagee) being expressly waived by Lessor.
18.8.13 Lessor, within 10 days after a request in writing by Lessee
or any Permitted Leasehold Mortgagee, shall
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furnish a written statement, duly acknowledged, that this Lease is in full force
and effect and unamended, or if there are any amendments, such statement will
specify the amendments, and that there are no defaults by Lessee that are known
to Lessor, or if there are any known defaults, such statement shall specify the
defaults Lessor claims exist.
18.8.14 No payment made to Lessor by any Permitted Leasehold
Mortgagee shall constitute agreement that such payment was, in fact, due under
the terms of this Lease; and the Permitted Leasehold Mortgagee having made any
payment to Lessor pursuant to Lessor's wrongful, improper, or mistaken notice or
demand shall be entitled to the return of any such payment or portion, provided
it shall have made demand not later than one year after the date of its payment.
18.8.15 Lessor, on request, shall execute, acknowledge, and deliver
to each Permitted Leasehold Mortgagee an agreement prepared at the sole cost and
expense of Lessee, in form satisfactory to the Permitted Leasehold Mortgagee and
Lessor, among Lessor, Lessee, and the Permitted Leasehold Mortgagee, agreeing to
all the provisions of this section.
18.8.16 Lessor shall at no time be required to subordinate its fee
simple interest in the Premises to the lien of any leasehold mortgage, nor to
mortgage its fee simple interest in the Premises as collateral or additional
security for any leasehold mortgage. Lessor shall attorn to any Permitted
Leasehold Mortgagee or any other person who becomes Lessee by, through, or under
a Permitted Leasehold Mortgage.
18.8.17 If Lessee is declared bankrupt or insolvent and this Lease is
thereafter lawfully cancelled or rejected, Lessor shall immediately execute a
new lease under the same terms and conditions as this Lease to the Permitted
Leasehold Mortgagee or its nominee, provided that all defaults under this Lease
except the bankruptcy or insolvency of Lessee be cured by the Permitted
Leasehold Mortgagee or its nominee.
19. TRADE FIXTURES AND PERSONAL PROPERTY.
19.1 LESSOR'S PROPERTY. All fixtures, carpeting, equipment,
improvements and appurtenances attached to or built into each Facility at the
commencement of or during the Lease Term, whether or not by or at the expense of
Lessee, shall be and remain a part of each Facility, shall be deemed the
property of Lessor and shall not be removed by Lessee, except as provided in
Section 19.2.
19.2 LESSEE'S PROPERTY. All business and trade fixtures, machinery
and equipment, communications equipment and office equipment which are installed
in each Facility by or for the account of Lessee without expense to Lessor and
which can be removed without structural damage to each Facility and all
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furniture, furnishings (excluding window coverings) and other articles of
movable personal property owned by Lessee and located in each Facility (herein
collectively called "Lessee's Property") shall be and remain the property of
Lessee and may be removed by Lessee at any time during the term of this Lease;
provided, that if any of Lessee's Property is removed, Lessee shall repair or
pay the cost of repairing any damage to each Facility resulting from such
installation and/or removal. Any equipment or other property for which Lessor
shall have granted any allowance or credit to Lessee shall be deemed not to have
been installed by or for the account of Lessee without expense to Lessor, shall
not be considered Lessee's Property, and shall be deemed the property of Lessor.
19.3 ABANDONMENT. Any items of Lessee's Property which shall remain
in a Facility after the expiration date of this Lease, or after a period of
fifteen (15) days following an earlier termination date, at the option of
Lessor, may be deemed to have been abandoned, and in such case such items may be
retained by Lessor, without accountability, in such manner as Lessor shall
determine at Lessee's expense.
20. MEMORANDUM OF LEASE.
This Lease shall not be recorded, but upon the request of either
party, a Memorandum of Lease, in the form attached hereto as Exhibit C, shall be
executed and acknowledged by the parties and recorded in the county where the
Premises are located with information sufficient to satisfy any reasonable
request of any Permitted Leasehold Mortgagee.
21. NOTICES.
Any notice provided for herein shall be given by personal delivery or
by certified United States Mail, return receipt requested, postage prepaid or by
reputable overnight delivery, addressed, if to Lessor,to:
HealthCare Partners, LLC
Good Samaritan Hospital
3600 NW Samaritan Drive
Corvallis, OR 97339
with a copy of any Lessor notice to:
Eugene L. Grant, Esq.
Schwabe Williamson & Wyatt
1211 SW Fifth Avenue, Suite 1600-1800
Portland, Oregon 97204
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and, if to Lessee:
The Corvallis Clinic, P.C.
3680 N.W. Samaritan Drive
Corvallis, OR 97330
with a copy of any Lessee notice to:
Howard Feuerstein, Esq.
Stoel Rives Boley Jones & Grey
900 S.W. Fifth, Suite 2300
Portland, OR 97204
All notices under this Lease shall be in writing and shall be effective upon
receipt. The person and the place to which notices are to be mailed may be
changed by either party by notice to the other.
22. RIGHTS OF SUCCESSORS.
All rights and obligations under this Lease shall bind, and inure to
the benefit of, the parties hereto and their successors and permitted assigns.
23. HOLDOVER.
If the Lessee shall hold over following the expiration of the Lease
Term, such holding over shall be on a month-to-month tenancy under the terms of
this Lease, except that the monthly Rent payable hereunder shall be 150% of the
Rent payable during the most recent Lease Term, provided, however, that if
Lessor shall have given notice to Lessee that the Premises or any portion
thereof have been relet and the deadline by which possession of the Premises or
portion thereof is needed in order to avoid a default on the Lessor's
obligations to prepare and deliver the same to the new occupant then Lessee
shall be liable for Lessor's consequential damages if the failure to return the
Premises to Lessor results in a loss, claim, damage, or expense to or from any
such third party. Upon request, Lessor shall provide satisfactory evidence to
Lessee of the need for the deadline specified in Lessor's warning notice.
Lessee's removal of trade fixtures from the Premises after expiration of the
Lease Term as provided in Article 19 shall not create a holdover tenancy.
24. SUBORDINATION AND ESTOPPEL.
24.1 CONDITIONAL AGREEMENT TO SUBORDINATE. In the event Lessor places
a mortgage or trust deed ("Mortgage") on the Premises and the holder thereof
("Mortgagee") requires that this Lease be subordinate thereto, Lessee agrees to
subordinate this Lease to the Mortgage, provided the Mortgagee executes an
agreement with Lessee, that in the event of foreclosure of such Mortgage or
acquisition of the Premises by deed in lieu of
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foreclosure of such Mortgage, Lessee's (and any permitted sublessee's)
possession of the Premises shall remain undisturbed and Lessee's rights under
this Lease shall be recognized and shall not be adversely affected so long as no
uncured breach of this Lease exists. The term Mortgagee shall be deemed to
include any successor in interest to Mortgagee.
24.2 DELIVERY OF SUBORDINATION AGREEMENT. Subject to the
conditions set forth above, Lessee agrees to execute and deliver to Lessor
any instruments necessary or proper to effect a subordination complying with
this Article.
24.3 DELIVERY OF LEASE AMENDMENTS. Lessee agrees to amend this
Lease from time to time to the extent reasonably requested by a Lending
Institution proposing to make Lessor a loan secured by a Mortgage, provided
that such proposed amendments do not materially and adversely affect the
right of Lessee or Lessee's interest in the Premises. All reasonable
expenses incurred by Lessee in connection with any such amendment shall be
paid by Lessor.
24.4 NOTICE. If any act or omission of Lessor would give Lessee
the right, immediately or after lapse of a period of time, to cancel or
terminate this Lease, or to claim a partial or total eviction, Lessee shall
not exercise such right: (i) until it has given written notice of such act
or omission to Lessor and the Mortgagee whose name and address shall
previously have been furnished to Lessee; and (ii) until thirty (30) days
shall have elapsed following the time when such Mortgagee shall have become
entitled under the Mortgage to remedy the same.
24.5 ATTORNMENT. For the purposes of this Section, the term
"Successor Lessor" shall mean the Mortgagee if the same succeeds to the
rights of Lessor under this Lease, whether through possession or foreclosure
action or delivery of a new lease or deed, or any third party that succeeds
to the rights of Lessor under this Lease by virtue of having purchased the
Premises or a part thereof at a foreclosure sale. At the request of a
Successor Lessor and upon such Successor Lessor's written agreement to accept
Lessee's attornment, and to not disturb Lessee's quiet possession of the
Premises, Lessee shall attorn to and recognize such Successor Lessor as
Lessee's Lessor under this Lease and shall promptly execute and deliver any
instrument that such Successor Lessor may reasonably request to evidence such
attornment. Upon such attornment this Lease shall continue in full force and
effect as a direct lease between the Successor Lessor and Lessee upon all of
the terms, conditions and covenants as are set forth in this Lease except
that the Successor Lessor shall not: (i) be liable for any previous act or
omission of Lessor under this Lease; (ii) be subject to any offset,
deficiency or defense which theretofore shall have accrued to Lessee against
Lessor; or (iii) be bound by any previous modification of this Lease or by
any previous prepayment of more than one (1) month's Rent, unless such
modification or prepayment
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shall have been expressly approved in writing by the Mortgagee through or by
reason of which the Successor Lessor shall have succeeded to the right of Lessor
under this Lease.
24.6 ESTOPPEL. Lessee shall, from time to time, within ten (10)
days following written request from Lessor, execute and deliver to Lessor a
written statement certifying (a) that this Lease is in full force and effect
and is unmodified (or, if modified, identifying the modification); (b) the
date to which the Rent reserved hereunder has been paid; (c) that there are
not, to Lessee's knowledge, any uncured defaults on the part of Lessor
hereunder, or specifying such defaults if any are claimed; and (d) other
pertinent information reasonably requested concerning its tenancy in the
Premises. Any such statement may be relied upon by any Mortgagee or
prospective purchaser of all or any part of the Premises.
25. MISCELLANEOUS PROVISIONS.
25.1 INTEREST. Except as otherwise provided herein, any sum which
remains due and owing from either Lessor or Lessee to the other after the
date on which it should have been paid in accordance with the provisions of
this Lease shall bear interest from the due date until paid at the Overdue
Rate, which interest shall be payable on demand as Supplemental Rent.
25.2 PARTIAL INVALIDITY. If any term or provision of this Lease
or the application thereof to any person or circumstances shall to any extent
be invalid and unenforceable, the remainder of this Lease or the application
of such term or provision to persons or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected thereby, and each
term and provision of this Lease shall be valid and shall be enforced to the
extent permitted by law.
25.3 WAIVER. The failure of a party to insist upon a strict
performance of any of the terms, conditions and covenants herein shall not be
deemed a waiver of any rights or remedies that the party may have, and shall
not be deemed a waiver of any subsequent breach or default in the terms,
conditions and covenants herein contained.
25.4 MODIFICATION. No change in the provisions of this Lease
shall be effective unless made in writing and signed by all parties to this
Lease.
25.5 HEADINGS. The headings preceding the text of sections of
this Lease are for convenience only and shall not modify or affect the
substantive provisions of this Lease.
25.6 ENTIRE AGREEMENT. There are no verbal or other agreements
(unless attached hereto or specifically referred to herein) which modify or
affect this Lease. This Lease supersedes
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any and all prior agreements executed by or on behalf of the parties hereto
regarding the Premises.
25.7 GOOD FAITH AND FAIR DEALING. The parties intend that the
obligation of good faith and fair dealing apply to this Lease generally and
that no negative inferences be drawn by the absence of any explicit
obligation to be reasonable with respect to any particular aspect of this
Lease. The obligation of good faith and fair dealing shall only be negated
if arbitrariness is clearly and explicitly permitted as to the specific item
in question such as by a party being given the right to use its "sole and
unfettered discretion." If Lessee shall request Lessor's consent and Lessor
shall fail or refuse to give such consent or if Lessor shall make a
determination which Lessee believes is unreasonable, Lessee shall not be
entitled to any damages for any such withholding by Lessor of its consent or
its determination, it being intended that the sole and exclusive remedy for a
wrongful withholding of consent or determination shall be arbitration of the
dispute in the same manner as for adjustment of the Base Rent as set forth in
Section 2.3, above, except that the arbitrators shall be licensed attorneys
with extensive experience and expertise in commercial real estate
transactions.
25.8 BROKERS. No broker, finder, investment banker or
intermediary has been retained by any of the parties to this Lease in
connection with the transactions contemplated hereby.
25.9 OPTION TO PURCHASE.
25.9.1 GRANT. Lessor grants to Lessee the sole, exclusive
and irrevocable option to purchase the Premises at any time during the Lease
Term or Extension Term, subject to the Hospital's interest in the Ground
Lease, if applicable, provided, however, that Lessee is not then in default
under this Lease and that this option may only be exercised as to the entire
Premises as a whole.
25.9.2 MANNER OF EXERCISE. Lessee may exercise its option to
purchase by written notice to Lessor given at least 120 days prior to the
expiration of the Lease Term or any Extension Term.
25.9.3 PURCHASE PRICE. The purchase price for the Premises
shall be its fair market value. After exercise of the option to purchase,
the parties shall discuss and attempt to agree upon such fair market value.
If the parties are unable to agree upon the fair market value within thirty
(30) days following exercise of the option, the fair market value shall be
determined by arbitration in the same manner set forth for the adjustment of
Base Rent pursuant to Section 2.3, above. The fair market value shall be
determined by considering the Encumbrances affecting the title to the
Premises and all other relevant factors, but the value of any referrals by
Lessee of its patients
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to the Good Samaritan Hospital for medical procedures shall not be a relevant
factor and shall not be used to justify any decrease in what would otherwise be
the fair market value.
25.9.4 CANCELLATION OF PURCHASE. Lessee may elect to rescind
its exercise of the purchase option at any time within thirty (30) days after
the purchase price has been fixed. In such case, Lessee shall pay all of the
costs of any arbitration under this Section 25 and shall pay Lessor the
reasonable value of the time of its personnel spent on the arbitration.
25.9.5 PAYMENT OF PURCHASE PRICE. Lessee shall pay the
purchase price in full at closing.
25.9.6 CONVEYANCE. Conveyance of the Premises shall be by
Special Warranty Deed, or in the case of Leased Parcels, if any, by
Assignment of Lessee's Interest.
25.9.7 CLOSING. The purchase shall be closed on or before
ninety (90) days following determination of the purchase price, but in no
event later than the end of the Lease Term. All expenses connected with the
closing of the purchase shall be paid by Lessee such that the purchase price
is fully net to the Lessor. The costs to be paid by the Lessee include but
are not limited to recording fees, escrow fees, title insurance premiums,
brokerage fees, lender's fees, and the like. Lessor shall be responsible for
the costs of clearing any Liens from the title other than the Lien for Real
Estate Taxes which are not yet due nor payable, and the Ground Lease. Real
Estate Taxes and Rent under this Lease attributable to the Premises shall be
prorated to the date of closing. Charges that are the responsibility of
Lessee under this Lease shall not be prorated.
25.9.8 TITLE INSURANCE. As soon as practicable after
closing, Lessor at Lessee's expense, shall, as to all of the Premises other
than the Leased Parcels, furnish Lessee with an owner's policy of title
insurance in the amount of the total purchase price for the Premises (except
the Leased Parcels) subject to the standard printed exceptions of the title
insurance company and exceptions for any Encumbrances affecting the Premises
but not subject to any Liens other than the Lien for Real Estate Taxes not
yet due nor payable. As to the Leased Premises, Lessor, at Lessee's
expenses, shall furnish Lessee with a policy of title insurance insuring
Lessee's leasehold interest in the Leased Parcels, in the amount of the
purchase price attributable to the Leased Parcels, subject to the standard
printed exceptions of the title insurance company and exceptions for any
Encumbrances affecting the Leased Parcels, but not subject to any Liens other
than the Lien for Real Estate Taxes not yet due nor payable and the Ground
Lease.
25.9.9 TITLE INSURANCE. As soon as practicable after
closing, Lessor at Lessee's expense, shall furnish Lessee
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with an owner's policy of title insurance in the amount of the total purchase
price for the Premises subject to the standard printed exceptions of the title
insurance company and exceptions for any Encumbrances affecting the Premises but
not subject to any Liens other than the Lien for Real Estate Taxes not yet due
nor payable.
25.9.10 ASSIGNMENT. After exercise of any of the options to
purchase, Lessee may elect to assign the right to purchase the Premises to a
third party, provided that such third party will lease the Premises to Lessee
upon closing of the purchase.
25.10 APPLICABLE LAW. This Lease shall be construed in accordance
with the laws of the State of Oregon.
EXECUTED effective as of the date first above written.
Lessor: Lessee:
HEALTHCARE PARTNERS, LLC, THE CORVALLIS CLINIC, P.C.,
an Oregon limited liability an Oregon Professional corporation
company
By: THE CORVALLIS CLINIC, P.C. By: /s/ Stephen V. Neville
an Oregon professional -----------------------------------
corporation, Member Name: Stephen V. Neville
---------------------------------
Its: President
---------------------------------
By: /s/ Stephen V. Neville
----------------------------
Name: Stephen V. Neville
--------------------------
Its: President
---------------------------
By: GOOD SAMARITAN HOSPITAL
CORVALLIS, an Oregon nonprofit
corporation, Member
By: /s/ Larry A. Mullins
----------------------------
Name: Larry A. Mullins
--------------------------
Its: President
----------------------------
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EXHIBIT A
TO LEASE AGREEMENT BETWEEN
HEALTHCARE PARTNERS, LLC, AND
THE CORVALLIS CLINIC, P.C.
PARCEL I:
TRACT I:
Lot 123, Block 30, PHILOMATH, in the City of Philomath, County of Benton and
State of Oregon.
Excepting therefrom the following:
Beginning at a railroad spike on the North line of and 75.15 feet West of the
Northeast corner of Lot 123, Block 30, City of Philomath, Benton County, Oregon;
thence Southerly, 148.53 feet to a 5/8 inch iron rod on the South line of and
75.2 feet West of the Southeast corner of said Lot; thence West along the South
line of said Lot 73.84 feet to a 3/4 inch iron rod marking the Southwest corner
of said lot; thence North, 148.83 feet more or less along the West line of said
Lot to the Northwest corner thereof; thence East along the North line of said
lot, 73.98 feet more or less to the place of beginning.
TRACT II:
Beginning at a railroad spike on the North line of and 75.15 feet West of the
Northeast corner of Lot 123, Block 30, City of Philomath, Benton County, Oregon;
thence Southerly 148.53 feet to a 5/8 inch iron rod on the South line of and
75.2 feet West of the Southeast corner of said Lot; thence West along the South
line of said Lot, 73.84 feet to a 3/4 inch rod marking the Southwest corner of
said Lot; thence North 148.83 feet, more or less, along the West line of said
Lot to the Northwest corner thereof; thence East along the North line of said
Lot, 73.98 feet, more or less, to the place of beginning.
PARCEL II:
LOT 3, TIMBERHILL PROFESSIONAL PARK, City of Corvallis, Benton County, Oregon
(the "Property").
PARCEL III:
TRACT I: (Clinic Building)
Beginning at a point, said point being 1011.98 feet South and 393.70 feet East
of the Southwest corner of the Wm. Knotts Donation Land Claim No. 45 in Section
23, Township 11 South, Range 5 West, Willamette Base and Meridian, Benton
County, Oregon; running thence South 36 degrees 45'30" West 82.54 feet to the
true point
EXHIBIT A TO LEASE
PAGE 1 OF 5
<PAGE>
of beginning for the lease area; thence South 53 degrees 14'30" East 10 feet;
thence South 36 degrees 45'30" West 168.21 feet; thence North 53 degrees 14'30"
West 214.58 feet; thence North 36 degrees 45'30" East 58.40 feet; thence North
53 degrees 14'30" West 54.00 feet; thence North 36 degrees 45'30" East 38.33
feet to the Southerly line of that tract of land described in Benton County
Microfilm Records M-39214; thence North 58 degrees 19'13" East along said
Southerly line 62.76 feet; thence South 53 degrees 14'30" East 16.97 feet;
thence North 36 degrees 45'30" East 33.33 feet; thence South 53 degrees 14'30"
East 158.63 feet; thence South 36 degrees 45'30" West 20.21 feet; thence South
53 degrees 14'30" East 59.91 feet to the true point of beginning.
TRACT II: (Canopy overhang and support and access)
Beginning at a point, said point being 980.62 feet South and 94.37 feet East of
the Southwest corner of the Wm. Knotts Donation Land Claim No. 45 in Section 23,
Township 11 South, Range 5 West, Willamette Base and Meridian, Benton County,
Oregon, said point being on the Southerly line of the tract of land described in
Benton County Microfilm Records M-39214; running thence North 58 degrees 19'13"
East along said line 62.76 feet; thence North 53 degrees 14'30" West 23.07 feet;
thence South 36 degrees 45'30" West 58.35 feet to the point of beginning.
TRACT III:
A portion of land in the Northeast quarter of Section 23, Township 11 South,
Range 5, West Willamette Meridian, Benton County, Oregon; said parcel also being
in the H.C. Lewis Donation Land Claim No. 47.
Commencing at a 1 inch bar which is the Southwest corner of the William Knotts
Donation Land Claim No. 45; thence South 21 degrees 15'28" East, 1085.86 feet to
a 5/8 inch rod which is a reference point for this lease description; thence
North 79 degrees 06'43" West, 66.33 feet to a point which is the Northeast
corner of this lease description and the point of beginning; thence North 53
degrees 14'30" West, 149.50 feet to a point on the Southerly line of a tract of
land described in Benton County Microfilm Records as M-39214; thence South 58
degrees 19'13" West along said line, 24.84 feet; thence South 36 degrees 45'30"
West, 10.23 feet; thence South 53 degrees 14'30" East, 158.63 feet, parallel to
and 33.33 feet from the most Northerly line of this lease description; thence
South 36 degrees 45'30" West, 20.21 feet; thence South 53 degrees 14'30" East,
29.58 feet; thence North 36 degrees 45'30" East, 40.46 feet; thence North 53
degrees 14'30" West, 25.58 feet; thence North 36 degrees 45'30" East, 5.00 feet;
thence North 53 degrees 14'30" West, 4.00 feet; thence North 36 degrees 45'30"
East, 8.08 feet to the point of beginning.
EASEMENT A:
Together with an easement for ingress and egress more particularly described as
follows:
A strip of land 24 feet wide being 12 feet on each side, when measured at right
angles to the following described center line:
Beginning at a point 1011.98 feet South and 393.70 feet East of the Southwest
corner of the Wm. Knotts Donation Land Claim No. 45 in Section 23, Township 11
South, Range 5 West, Willamette Base and Meridian, Benton County, Oregon;
Exhibit A to Lease
Page 2 of 5
<PAGE>
thence South 31 degrees 55'30" East 207.99 feet; thence along a curve to the
right, the radius of which is 162.64 feet a distance of 87.14 feet; (the long
chord of which is South 16 degrees 34'30" East 86.11 feet); thence South 1
degree 13'31" East 0.70 feet more or less to the North line of Elks Drive
Extension.
EASEMENT B:
Together with an easement for ingress and egress more particularly described as
follows:
A strip of land 24 feet wide being 12 feet on each side when measured at right
angles to the following described center line:
Beginning at a point being 1201.43 feet South and 85.55 feet West of the
Southwest corner of the Wm. Knotts Donation Land Claim No. 45 in Section 23,
Township 11 South, Range 5 West, Willamette Base and Meridian, Benton County,
Oregon, said point being on the North line of Elks Drive Extension; running
thence North 36 degrees 45'30" East 382.20 feet to a point of curvature; thence
along a curve, the radius of which is 190.00 feet, to the left a distance of
78.71 feet to a point of tangency (the long chord of which is North 24 degrees
53'26" East 78.50 feet); thence North 13 degrees 01'21" East 151.54 feet to the
ending point of this easement.
EASEMENT B-1:
Together with an easement for ingress and egress over and across the following
described property:
Beginning at a point, said point being 933.86 feet South and 129.29 feet East of
the Southwest corner of the Wm. Knotts Donation Land Claim No. 45 in Section 23,
Township 11 South, Range 5 West, Willamette Meridian Base and Meridian, Benton
County, Oregon, said point being on the Southerly line of a 24 foot wide access
easement; thence North 36 degrees 45'30" East 32.00 feet; thence South 0 degrees
09'28" East 46.00 feet; thence North 53 degrees 14'30" West 33.04 feet to the
point of beginning.
EASEMENT C:
Together with an easement for ingress and egress more particularly described as
follows:
A strip of land 24 feet wide when measured at right angles to the following
described center line:
Beginning at a point, said point being 1101.68 feet South and 311.96 feet West
of the Southwest corner of the Wm. Knotts Donation Land Claim No. 45 in Section
23, Township 11 South, Range 5 West, Willamette Base and Meridian, Benton
County, Oregon, said point also being South 79 degrees 07'52" West 65.89 feet
from the N.W. Satinwood on the North right of way line of N.W. Elks Drive
Extension; running thence North 10 degrees 52'09" East 65.82 feet to a point of
curvature; thence along a curve to the right, the radius of which is 480.00
feet, a distance of 216.89 feet the long chord of which is North 23 degrees
48'50" East 215.05 feet) to a point of tangency, thence North 36 degrees 45'30"
East 240.10 feet more or less to the center line of N.W. Samaritan Drive; thence
North 41 degrees 53'15" East 130.00 feet to the ending point.
EASEMENT D: (Samaritan Drive)
Exhibit A to Lease
Page 3 of 5
<PAGE>
Together with an easement for ingress and egress more particularly described as
follows:
A strip of land 34 feet wide, being 17 feet on each side, when measured at right
angles to the following described center line:
Beginning at a point being 164.27 feet West and 586.14 feet South of the
Southwest corner of the Wm. Knotts Donation Land Claim No. 45 in Section 23,
Township 11 South, Range 5 West, Willamette Base and Meridian, Benton County,
Oregon; said point being on the Easterly right of way line of N.W. Satinwood;
running thence South 58 degrees 20'28" East, 75 feet; thence along a curve to
the right, the radius of which is 403 feet, a distance of 71.94 feet (the long
chord of which is South 53 degrees 13'37" East, 71.85 feet; thence South 48
degrees 06'45" East, 64.97 feet; thence along a curve to the left, the radius of
which is 397 feet, a distance of 590.88 feet (the long chord of which is North
89 degrees 14'56" East a distance of 537.80 feet) to the ending point of this
easement, excepting portions thereof lying in the property described in Parcels
1, 2 and 3 of document recorded as M-40189, Microfilm Records of Benton County,
Oregon.
PARCEL IV:
Parcels 1 and 2, Partition Plat No. 92-22, recorded September 24, 1992, in the
Book of Partition Plats, Benton County, Oregon.
PARCEL V (65-car parking lot and access road)
Beginning at a point, said point being 1011.98 feet South and 393.70 feet East
of the Southwest corner of the Wm. Knotts Donation Land Claim No. 45 in Section
23, Township 11 South, Range 5 West, Willamette Base and Meridian, Benton
County, Oregon; thence South 58 degrees 04'30" West 12.00 feet; thence South 31
degrees 55'30" East 15.42 feet to the true point of beginning; thence South 36
degrees 45'30" West 233.97 feet; thence North 53 degrees 14'30" West 214.58
feet; thence North 36 degrees 45'30" East 58.40 feet; thence North 53 degrees
14'30" West 54.00 feet; thence South 36 degrees 45'30" West 174.72 feet; thence
South 53 degrees 14'30" East 197.19 feet; thence North 88 degrees 46'31" East
275.81 feet; thence North 36 degrees 45'30" East 123.58 feet; thence North 31
degrees 55'30" West 156.72 feet to the true point of beginning.
PARCEL VI (285-car parking lot)
Beginning at a point being 1201.43 feet South and 85.55 feet West of the
Southwest corner of the Wm. Knotts Donation Land Claim No. 45, in Section 23,
Township 11 South, Range 5 West, Willamette Base and Meridian, Benton County,
Oregon; thence North 53 degrees 24'29" West 12.00 feet; thence North 36 degrees
45'30" East 10.00 feet to the true point of beginning; thence North 53 degrees
24'27" West 17.13 feet; thence along a curve to the left of the radius of which
is 440 feet a distance of 197.54 feet (the
EXHIBIT A TO LEASE
PAGE 4 OF 5
<PAGE>
long chord of which is North 66 degrees 16'09" West 195.88 feet); thence North
79 degrees 07'51" West 16.33 feet; thence North 10 degrees 52'09" East 55.82
feet, to a point of curvature; thence along a curve to the right, the radius of
which is 468.00 feet a distance of 211.47 feet (the long chord of which is North
23 degrees 48'50" East 209.67 feet) to the point of tangency; thence North 36
degrees 45'30" East 181.74 feet; thence South 53 degrees 14'30" East 294.00 feet
to a curve concaved Northwesterly, the radius of which is 178.00 feet; thence
along said curve a distance of 12.80 feet to a point of tangency (the long chord
of which is South 38 degrees 48'06" West 12.80 feet); thence South 36 degrees
45'30" West 372.20 feet to the true point of beginning.
PARCEL VII (43-car parking lot)
Beginning at a point, said point 746.70 feet South and 181.78 feet East of the
Southwest corner of the Wm. Knotts Donation Land Claim No. 45 in Section 23,
Township 11 South, Range 5 West, Willamette Base and Meridian, Benton County,
Oregon; thence North 13 degrees 01'21" East 75.06 feet; thence along a curve to
the right which is concaved Northeasterly, the radius of which is 267.00 feet, a
distance of 122.51 feet (the long chord of which is North 61 degrees 15'26" West
121.44 feet) to a point of tangency; thence North 48 degrees 06'45" West 86.24
feet; thence South 41 degrees 53'15" West 75.00 feet; thence South 48 degrees
06'45" East 86.24 feet; thence along a curve to the left, the radius of which is
342.00 feet a distance of 160.29 feet (the long chord of which is South 61
degrees 32'23" East 158.83 feet) to the point of beginning.
EXHIBIT A TO LEASE
PAGE 5 OF 5
<PAGE>
EXHIBIT B
Basic Lease Data
Lease Agreement between
HEALTHCARE PARTNERS, L.L.C.,
an Oregon limited liability company, Lessor
and
THE CORVALLIS CLINIC, P.C.,
an Oregon professional corporation, Lessee
FACILITY SQUARE FOOTAGE OF FLOOR AREA BASE RENT
Asbury Building 83,715 $100,458.00
Aumann Building 47,459 56,950.80
C.F. Medical Building 5,762 6,914.40
Philomath Family Clinic 5,726 6,871.20
1 - EXHIBIT B
<PAGE>
EXHIBIT C
AFTER RECORDING RETURN TO:
Howard M. Feuerstein
Stoel Rives Boley Jones & Grey
900 S.W. Fifth Avenue, Suite 2300
Portland, OR 97204
MEMORANDUM OF LEASE
KNOW ALL MEN BY THESE PRESENTS that HEALTHCARE PARTNERS, LLC, an Oregon
limited liability company, as the lessor, has leased to THE CORVALLIS CLINIC,
P.C., an Oregon professional corporation, as the lessee, by Lease Agreement
dated June 1, 1995 (herein the "Lease") the real property described on Exhibit
"A" attached hereto, together with all improvements on such real property
(herein collectively the "Premises"). The Lease contains provisions that permit
the lessee to acquire the Premises.
Dated this 1st day of June, 1995.
LESSOR: LESSEE:
HEALTHCARE PARTNERS, LLC, an THE CORVALLIS CLINIC, P.C., an
Oregon limited liability company Oregon professional corporation
By: THE CORVALLIS CLINIC,
P.C., an Oregon professional
corporation, Member
By: /s/ STEPHEN V. NEVILLE By: /s/ STEPHEN V. NEVILLE
--------------------------- -----------------------------------
Name: STEPHEN V. NEVILLE Name: STEPHEN V. NEVILLE
-------------------------- ---------------------------------
Its: PRESIDENT Its: PRESIDENT
--------------------------- ----------------------------------
By: GOOD SAMARITAN HOSPITAL CORVALLIS,
an Oregon nonprofit corporation,
Member
By: /s/ LARRY A. MULLINS
----------------------------
Name: LARRY A. MULLINS
--------------------------
Its: PRESIDENT
---------------------------
(Acknowledgments on next page)
1 - MEMORANDUM OF LEASE
<PAGE>
(Continued from prior page)
STATE OF OREGON )
) ss.
County of Benton )
This instrument was acknowledged before me this 1st day of June, 1995,
by __________________, _____________________ of The Corvallis Clinic, P.C., an
Oregon professional corporation, as Member of HEALTHCARE PARTNERS, LLC, an
Oregon limited liability company, on behalf of the company.
---------------------------------------
NOTARY PUBLIC FOR OREGON
My Commission Expires: ________________
STATE OF OREGON )
) ss.
County of Benton )
This instrument was acknowledged before me this 1st day of June, 1995,
by __________________, ___________________________________ of GOOD SAMARITAN
HOSPITAL CORVALLIS, an Oregon nonprofit corporation, as Member of HEALTHCARE
PARTNERS, LLC, an Oregon limited liability company, on behalf of the company.
---------------------------------------
NOTARY PUBLIC FOR OREGON
My Commission Expires: ________________
STATE OF OREGON )
) ss.
County of Benton )
This instrument was acknowledged before me this 1st day of June, 1995,
by _________________, _______________________________________ of THE CORVALLIS
CLINIC, P.C., an Oregon professional corporation, on behalf of the corporation.
---------------------------------------
NOTARY PUBLIC FOR OREGON
My Commission Expires: ________________
2 - MEMORANDUM OF LEASE
<PAGE>
LEASE
ROGUE VALLEY HEALTH SERVICES, LESSOR
and
MEDFORD CLINIC, P.C., LESSEE
Dated: June 13th, 1989
<PAGE>
INDEX
PAGE
RECITALS 1
ARTICLES:
1. CONTEMPORANEOUS PROJECT AGREEMENT, TOTAL PROJECT
VALUE 1
2. PREMISES 2
3. TERM 2
4. OPTION TO EXTEND 2
5. RENT 3
6. REAL PROPERTY TAXES 5
7. FIRE INSURANCE AND CASUALTY COVERAGE 5
8. NET LEASE 6
9. MAINTENANCE AND REPAIR OF LEASED PREMISES 6
10. UTILITIES AND PERSONAL PROPERTY TAXES 6
11. USE OF PREMISES 7
12. INGRESS AND EGRESS EASEMENTS 7
13. PARKING AND COMMON USE AREAS AND FACILITIES 8
14. LIENS AND ENCUMBRANCES 9
15. LIABILITY INSURANCE 10
16. INDEMNIFICATION 11
17. WAIVER OF SUBROGATION RIGHTS 11
18. DAMAGE OR DESTRUCTION OF THE BUILDING 12
19. QUIET ENJOYMENT 12
20. ALTERATIONS 12
21. EMINENT DOMAIN - TOTAL TAKING 13
22. EMINENT DOMAIN - PARTIAL TAKING 13
23. EMINENT DOMAIN - SALE IN LIEU OF CONDEMNATION 14
24. LESSOR'S RIGHT OF INSPECTION 14
25. ASSIGNMENT 14
26. TIME OF ESSENCE 15
27. DEFAULT 15
28. REMEDIES ON DEFAULT 15
29. SURRENDER OF PREMISES 17
30. ATTORNEY'S FEES 18
31. NOTICES 18
32. SUCCESSION 19
33. PARTIAL INVALIDITY 19
34. OPTION TO PURCHASE 19
35. RIGHT OF FIRST REFUSAL TO REPURCHASE BUILDING 20
36. ARBITRATION 21
37. MEMORANDUM OF LEASE 22
38. CONTINGENCY 22
39. MERGER 22
40. SALE OF LAND 22
41. ADDITION TO OFFICE BUILDING 23
SIGNATURES 25
<PAGE>
LEASE
THIS LEASE entered into this 13th day of September, 1989 between ROGUE
VALLEY HEALTH SERVICES, INC., an Oregon nonprofit corporation, hereinafter
referred to as "Lessor", and MEDFORD CLINIC, P.C., an Oregon professional
corporation, hereinafter referred to as "Lessee",
WITNESSETH:
RECITALS:
A. Lessor is the owner of that certain real property situated in Medford,
Jackson County, Oregon, more particularly described as parcels 1 and 2 on
exhibit "A" attached hereto and made a part hereof.
B. Lessee is a professional corporation and desires to locate its medical
practice on lessor's property described on exhibit "A". Lessor has agreed to
construct a medical clinic building for lessee on said premises according to the
terms of a separate agreement between the parties.
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
1. CONTEMPORANEOUS PROJECT AGREEMENT, TOTAL PROJECT
VALUE:
1.1 Construction: Lessor shall construct a medical clinic building for
lessee upon parcel 1 of said real property (hereinafter "the
building"), in accordance with a separate project agreement previously
executed by the parties on March 29, 1989.
1.2 Total Project Value: Upon completion of the project, the total project
value shall be calculated and the
1 - Lease
<PAGE>
calculation set forth on Exhibit "B" as an addendum to this lease.
Total project value shall determine the initial rent. The building
project value as defined on Exhibit "B" shall establish the initial
purchase price for the building should the purchase option be
exercised pursuant to Article 34. Total project value shall include
any and all costs, direct or indirect, incurred by lessor in
connection with building construction and site development;
including but not limited to legal, accounting, architectural,
engineering and other professional fees, governmental permits and
expenses, and other miscellaneous costs; and parcel 1 of the premises
at a value of $3.80 per square foot. The lessee may choose a graduated
rent schedule which will defer rent as specified herein. The sum of
the above costs, including deferred rent if any, will be the total
project value.
1.3 For purposes of a future purchase of the building, or a subordinated
ground lease, the addendum (Exhibit B) will include a percentage ratio
reflecting that portion of the total project value for the development
of the building only, and that portion relating to the value of the
site and the development of site improvements. This percentage ratio
shall be applied to the total project value so as to yield a site
project value.
2. PREMISES: Lessor rents to lessee and lessee rents from lessor the
above described real property (exhibit "A"), together with all improvements
hereinafter constructed thereon, and all referred to as the "premises".
3. TERM: This lease shall be for a term of 180 months commencing from
lessee's occupancy or upon issuance of a certificate of occupancy for the
building, whichever first occurs. Said lease shall terminate at midnight on the
last day of the 180th calendar month following commencement.
4. OPTION TO EXTEND: Provided lessee is not in default in its performance
of this lease, or any extension thereof, it
2 - Lease
<PAGE>
shall have the exclusive right and option to extend this lease for five
successive additional periods of ten years each upon all of the same terms and
conditions as are set forth herein, including but not limited to the periodic
adjustment of rent.
If lessee elects to exercise its option for the first additional ten-year
period, it shall do so by giving to lessor written notice not less than 180 days
prior to the end of the initial term of this lease.
To exercise any additional ten-year renewal term thereafter, lessee shall
follow the same procedure by giving written notice of the exercise not less than
180 days prior to the end of the renewal term.
If the lessee is in default in the performance of this lease, does not
exercise its option for the first additional ten-year renewal period or for any
subsequent additional ten-year renewal period thereafter, or if for any other
reason this lease is terminated or expires, lessee's options for any and all of
the following ten-year periods shall lapse and be void.
5. RENT: Lessee agrees to pay as rent for the leased premises the
following:
5.1 A base rent payable monthly in advance on or before the first day of
this lease and on or before the first working day of each and every
month thereafter during the first seven years of this lease shall be
$53,243.82.
A. Commencing with the 85th month, rent shall be adjusted by a
percentage equal to one-half the accumulated yearly changes in
the Consumer Price
3 - Lease
<PAGE>
Index for each of the first seven years. Any increase shall not
exceed a maximum of 3% per year, or a total increase of 21%. In
no event shall the rent decrease below that paid for the 84th
month. Rent shall be payable at the adjusted monthly rate
through and including the 120th month.
B. Beginning with the 121st month, rent shall again be adjusted by
one-half of the accumulated yearly changes in the Consumer Price
Index for each of years 8, 9 and 10. Said increase not to exceed
a maximum of 3% per year or a total increase of 9%. In no event
shall the rent decrease below that paid for the 120th month. Rent
shall be payable at this adjusted rate monthly through and
including the 180th month.
5.2 Adjustments to Rent during Renewal Periods: During the first and all
subsequent renewal terms, the rent shall be adjusted every five years,
commencing with the first monthly payment of the first renewal term,
by a percentage equal to one-half of the accumulated yearly changes in
the Consumer Price Index not to exceed a maximum increase of 3% per
year. In no event shall the rent decrease below that paid for the
last month of the previous term.
5.3 Lessee agrees to pay as additional rent all taxes, assessments,
utilities, insurance, interior and exterior maintenance, repairs and
all other incidental costs connected with the premises.
5.4 Option to Defer Rent: Lessee may, at lessee's option, defer a portion
of the rent for each of the first three years of the initial lease
term up to a maximum of $200,000 per year, for a total maximum
deferral of $600,000. Lessee must declare the amount of deferment upon
completion of the project. Any amount of rent deferred shall be added
to the value of the project and become part of the total project value
as described in paragraph 1, above. A fraction of the deferred rent
being a numerator of one (1) and a denominator equal to the number of
months of deferred rent shall be deducted from each monthly payment
for each of the months of deferred rent. No rent deferments will be
allowed after the first three years.
5.5 For purposes of computing rent adjustments pursuant to this article,
the Consumer Price Index used shall
4 - Lease
<PAGE>
be the Consumer Price Index published by the United States Bureau of
Labor Statistics entitled "U.S. City Average all Urban Consumers
(Portland area)." If said index is not published, adjustments shall be
based upon the most comparable index then available from the United
States Department of Labor.
5.6 In the event there is an addition constructed by lessor to the
building pursuant to article 41 of this lease, the rent for the
initial five-year period for the addition shall be established in the
manner provided in article 1.2 and exhibit "B" of this lease.
5.7 At the commencement of this lease, lessee shall not occupy or pay rent
on that undeveloped portion of the premises described as parcel 2.
Upon the occupancy of parcel 2 or after the initial term of this
lease, whichever shall occur first, lessee shall commence paying rent
on parcel 2. The rent on parcel 2 shall be computed on the same basis
as the rent for parcel 1.
5.8 In the event lessee exercises its option pursuant to article 34 of
this lease, the rent for the property included in the ground lease
shall be determined pursuant to article 1.2 and as set forth in the
Addendum (Exhibit B) to this lease.
6. REAL PROPERTY TAXES: Lessee shall pay all real property taxes and
assessments levied or assessed against the premises promptly as the same become
due and payable, and shall promptly provide lessor with proof of such payment.
7. FIRE INSURANCE AND CASUALTY COVERAGE: Lessee agrees to keep the
premises fully insured against loss by fire or casualty, with extended coverage,
in an amount not less than the full insurable replacement value of the building.
There shall be affixed to any policy of insurance a loss payable clause showing
the interest of lessor and lessee under the terms of this lease agreement. All
policies or certificates
5 - Lease
<PAGE>
evidencing said policies shall be delivered to lessor. In the event of fire or
other casualty, the insurance proceeds, if any, shall be used to repair or
replace as needed to restore the premises. Lessee shall pay all insurance
premiums promptly when due and shall promptly provide lessor with the proof of
such payment.
8. NET LEASE: Lessee shall be solely responsible for any and all costs
connected with the premises, of any nature whatsoever, and lessor shall have no
obligation to provide any services to the premises, and shall not be required to
incur any expenses in connection with the premises.
9. MAINTENANCE AND REPAIR OF LEASED PREMISES: Lessee shall be 100%
responsible for all repairs and maintenance in connection with the leased
premises, of any kind or nature whatsoever, including all repairs and
maintenance in connection with the building, the ground or other improvements
thereon. Lessee shall keep the premises in as good condition and repair as at
the time of initial occupancy, normal wear and tear excepted. Lessee agrees
that it shall hire lessor at a reasonable cost to install and maintain the
landscaping upon the leased premises.
10. UTILITIES AND PERSONAL PROPERTY TAX: Lessee agrees to pay all water,
gas, electricity, heat, telephone and all other utilities or services rendered
to the premises, and all such utilities shall be placed in lessee's name alone.
Lessee
6 - Lease
<PAGE>
further agrees to pay as the same become due and payable all personal property
taxes which may be levied or assessed against any property belonging to lessee.
11. USE OF THE PREMISES: Lessee agrees that:
11.1 It will not make any unlawful or offensive use of the premises.
11.2 It will not permit or allow the accumulation of litter or flammable
material upon the premises.
11.3 It shall comply with all applicable laws and governmental
regulations in storing, discharging or transporting hazardous wastes
or toxic substances from or on the premises. Hazardous wastes and
toxic substances are any wastes or substances defined as such and
regulated by any governmental body or agency.
11.4 Lessee shall use said premises for its medical practice or medically
related activities and shall make no other use of the property
without first obtaining the written consent of lessor.
12. INGRESS AND EGRESS EASEMENT: During the term of this lease, lessee,
its employees, agents, invitees, transferees, assigns and patients shall have a
nonexclusive easement for ingress and egress to the premises over and across
lessor's roads, driveways, parking lots and sidewalks presently existing or as
later constructed.
During the term of this lease, lessor, its employees, agents, invitees,
transferees, tenants, assigns and patients shall have a nonexclusive easement
for ingress and egress to the adjoining campus property over and across the
roads, driveways, parking lots and sidewalks presently existing or as later
constructed upon the leased premises. This easement does
7 - Lease
<PAGE>
not grant lessor, or any other lessees or invitees on the RVMC campus, the right
to park on the leased premises.
13. PARKING AND COMMON USE AREAS AND FACILITIES: All non-exclusive
automobile parking areas, driveways, entrances and exits thereto, and other
facilities furnished by lessor in or near the RVMC campus, including employee
parking areas, pedestrian sidewalks and ramps, landscaped areas, exterior
stairways, comfort stations and other areas and improvements provided by lessor
for the general use, in common, of tenants, their officers, agents, employees
and patients, shall at all times be subject to the exclusive control and
management of lessor, and lessor shall have the right from time to time to
establish, modify and enforce reasonable rules and regulations with respect to
all facilities and areas mentioned in this section. Lessor shall have the right
to construct, maintain and operate lighting facilities on all said areas and
improvements; to police the same; from time to time to change the area, level,
location and arrangement of parking areas and other facilities hereinabove
referred to; to restrict parking by tenants, their officers, agents and
employees to employee parking areas; to enforce parking charges (by operation of
meters or otherwise), with appropriate provisions for free parking ticket
validating by tenants; to close all or any portion of said areas or facilities
to such extent as may, in the opinion of lessor's counsel, be legally sufficient
to
8 - Lease
<PAGE>
prevent a dedication thereof or the accrual of any rights to any person or the
public therein; to close temporarily all or any portion of the parking areas or
facilities; to discourage non-patient parking; and to do and perform such other
acts in and to said areas and improvements as, in the use of good business
judgment, lessor shall determine to be advisable with a view to the improvement
of the convenience and use thereof by tenants, their officers, agents, employees
and patients. Lessor will operate and maintain the common facilities referred to
above in such manner as lessor, in its sole discretion, shall determine from
time to time. Without limiting the scope of such discretion, lessor shall have
the full right and authority to employ all personnel and to make all reasonable
rules and regulations pertaining to and necessary for the proper operation and
maintenance of the common areas and facilities.
This article is intended to describe lessor's rights in and to property
provided by lessor for the general use, in common, of tenants and not the leased
premises described on Exhibit "A" or the exclusive parking areas described
herein.
14. LIENS AND ENCUMBRANCES: Except with respect to activities for which
lessor is responsible, the lessee shall pay as due all claims for work done on
or for services rendered or materials furnished to the premises for or on behalf
of lessee and shall keep the premises free from any liens arising
9 - Lease
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therefrom. If lessee fails to pay any such claims or to discharge any lien,
lessor may do so and collect the costs as additional rent. Any amounts so added
shall bear interest at the rate of 12% per annum from the date expended by
lessor and shall be payable on demand. Such action by lessor shall not
constitute a waiver of any right or remedy which lessor may have on account of
lessee's default.
Lessee may withhold payment of any claim in connection with a good faith
dispute over the obligation to pay so long as lessor's property interests are
not jeopardized. If a lien is filed as a result of nonpayment, lessee shall,
within 30 days after knowledge of the filing, secure the discharge of the lien
or deposit with lessor cash or a sufficient corporate surety bond or other
security satisfactory to lessor in an amount sufficient to discharge the lien
plus any costs, attorney's fees and other charges which could accrue as a result
of a foreclosure or sale under the lien.
15. LIABILITY INSURANCE: During the first five years of the lease lessee
shall carry public liability and property damage insurance on the premises in
the amount of $1,000,000 public liability and $100,000 property damage. Lessor
shall be named as an additional insured on such policy of insurance and a memo
copy of the policy shall be furnished by lessee to lessor.
The limits of the liability insurance shall be reviewed
10 - Lease
<PAGE>
and revised each five years thereafter.
If the parties are unable to agree on the limits of the insurance that
should be secured, they shall have that amount determined by arbitration in the
manner provided for in Article 36 below. Provided, however, the arbitrators
picked by the parties shall be general insurance agents with experience in the
liability insurance business, and shall not be an insurance agent for either
party. The two insurance agent arbitrators shall choose a third arbitrator who
shall be a lawyer experienced in insurance defense litigation. The standard to
determine the appropriate amount of coverage is the reasonable amount of
insurance coverage in light of the type of risks involved and the parties to be
protected by the coverage.
16. INDEMNIFICATION: Lessee shall indemnify and defend lessor from any
claim, loss or liability, including any attorney fees and costs arising out of
or related to any activity of lessee, its agents, servants, customers,
subtenants or licensees on the premises or any condition of the premises or any
other property located on the premises.
17. WAIVER OF SUBROGATION RIGHTS: Each party hereby waives the
subrogation rights, if any, of each and all of its insurance carriers and each
party shall take such steps as necessary to inform all such carriers of this
agreement and to have riders, if necessary, placed upon any insurance policies
to carry the provisions of this paragraph into effect.
11 - Lease
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18. DAMAGE OR DESTRUCTION OF THE BUILDING: In the event of the destruction
or partial destruction of the building which is the subject of this lease by
fire or other casualty to the extent of 50% or more of its then sound value,
either party may within 30 days after such destruction elect to terminate the
lease. If the election be to terminate, this lease shall be terminated as of
the date of such fire or other casualty. If, however, the parties elect to
reconstruct or if the building be but partially destroyed and the damage does
not amount to 50% of the then sound value, lessor shall repair the building with
all convenient speed. In either event, if lessor shall rebuild or repair said
building or the portion thereof damaged, it shall have the right to take
possession of and occupy all of the premises or such part thereof as may be
reasonably necessary to make the repairs or rebuild said building and lessee
agrees to vacate the same upon request. For the period of time between the date
of such fire or other casualty and until such repairs have been substantially
completed, there shall be such an abatement of rent as may be fair and equitable
to the parties, considering the use which lessee may be able to make of the
premises during such period.
19. QUIET ENJOYMENT: If and as long as lessee pays the rent herein
specified and performs all of lessee's obligations hereunder, lessee shall
quietly enjoy the premises.
20. ALTERATIONS: Lessee may not make any alterations or
12 - Lease
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additions to the building in excess of $100,000, without first obtaining the
written consent of lessor, which consent shall not be unreasonably or
arbitrarily withheld. Any additions or alterations of the building shall become
part of the real property and belong to the owner of the building.
21. EMINENT DOMAIN - TOTAL TAKING: If a condemning authority takes all
the premises or portions sufficient to render the remaining premises reasonably
unsuitable for the use which the lessee was then making of the premises, the
lease shall terminate as of the date the title vests in the condemning
authorities. Lessor shall be entitled to all of the proceeds of condemnation
except tenant improvements and the lessee shall have no claim against lessor as
a result of the condemnation.
22. EMINENT DOMAIN - PARTIAL TAKING: If a portion of the premises is
condemned and paragraph 21 does not apply, the lease shall continue on the
following terms:
22.1 Lessor shall be entitled to all of the proceeds of condemnation
except tenant improvements and lessee shall have no claims
against lessor as a result of the condemnation.
22.2 Lessor shall proceed as soon as reasonably possible to make
such repairs and alterations to the premises as are necessary
to restore the remaining premises to a condition as comparable
as reasonably practicable to that existing at the time of the
condemnation. The lessor may, but shall not be required to,
perform alterations prior to the actual taking after the
portion to be taken has been finally determined. Rent shall be
abated to the extent the premises are untenantable during the
period of alteration and repair.
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22.3 After the date on which title vests in the condemning authority or an
earlier date on which alterations and repairs are commenced by lessor
to restore the balance of the property in anticipation of taking, the
rent shall be reduced commensurately with the reduction in value of
the premises, as an economic unit, on account of the partial taking.
If the parties are unable to agree upon the amount of reduction of
rent, the amount of such reduction shall be determined by arbitration
as set forth in Article 36 below.
22.4 If a portion of the lessor's property not included in the premises is
taken and severance damages are awarded on account of the premises, or
an award is made for detriment to the premises as a result of change
of grade of adjacent streets or other activity by a public body not
involving a physical taking of any portion of the land, this shall be
regarded as a partial condemnation and the rent shall be reduced to
the extent of diminution of the premises as though a portion had been
physically taken.
23. EMINENT DOMAIN - SALE IN LIEU OF CONDEMNATION: Sale of all or part of
the premises to a purchaser with the power of eminent domain in the face of a
threat or probability of exercise of the power shall be treated as a taking by
condemnation.
24. LESSOR'S RIGHT OF INSPECTION: Lessor, its agents and representatives,
shall have the right to enter upon and inspect the premises during normal
business hours and after 24 hours written notice provided that said inspection
does not unreasonably interfere with lessee's practice and provided further that
in the case of emergency, lessor shall have the right to immediately inspect
without notice.
25. ASSIGNMENT: Lessee shall not assign this lease or sublease the
premises without the prior written consent of
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lessor which consent shall not unreasonably be withheld, provided, however, that
lessee may sublease portions of the premises under 2,000 square feet without
obtaining permission of lessor.
26. TIME OF ESSENCE: Time is of the essence of this lease and waiver by
lessor in enforcing any of the terms and conditions hereof shall not constitute
a waiver of lessor's rights to insist upon strict compliance with such terms and
conditions in the future.
27. DEFAULT: The following shall be events of default:
27.1 Failure of lessee to pay any rent, including additional rent, within
ten days after the same becomes due. Lessor shall be obligated to
provide lessee with 10 days written notice of any failure to pay rent
one time and only one (1) time during each calendar year. Otherwise no
notice of failure to pay rent shall be required.
27.2 Failure of lessee to comply with any term or condition or fulfill any
obligation of the lease (other than the payment of rent including
additional rent), within thirty days after written notice by lessor
specifying the particulars in which lessor claims that lessee is in
default and lessee shall have said period of time within which to
commence action to remove any such default.
27.3 Insolvency of lessee; an assignment by lessee for the benefit of
creditors; the filing by lessee of a voluntary petition in bankruptcy;
an adjudication that lessee is bankrupt or the appointment of a
receiver for the properties of lessee; the filing of an involuntary
petition of bankruptcy and failure of lessee to secure a dismissal of
the petition within 30 days after filing; attachment of or the levying
of execution on the leasehold interest and failure of lessee to secure
discharge of the attachment or release of the levy of execution within
ten days.
28. REMEDIES ON DEFAULT:
15 - Lease
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28.1 In the event of a default, the lease may be terminated at the option
of the lessor by notice in writing to lessee. The notice may be given
before or within the running of any grace period for default and may
be included in a notice of failure of compliance given pursuant to
paragraph 27.2. If the premises are abandoned by lessee in connection
with a default, termination shall be automatic and without notice.
28.2 If the lease is not terminated by lessor upon default, lessor shall be
entitled to recover all damages from lessee for any default.
28.3 If the lease is terminated for any reason, lessee's liability to
lessor for damages shall survive such termination and the rights and
obligations of the parties shall be as follows:
A. Lessee shall surrender and vacate the premises immediately,
remove any property of lessee, including any fixtures which
lessee are required to remove at the end of the lease term and
perform any cleanup, alterations or other work required to leave
the premises in the condition required under Article 29 below,
and shall deliver all keys to lessor.
B. Lessor may re-enter, take possession of the premises and remove
any persons or property by legal action or by self help with the
use of reasonable force and without liability for damages.
28.4 Following re-entry lessor may relet the premises and in that
connection may:
A. Make any suitable alterations or refurbish the premises, or both,
or change the use of the premises, but lessor shall not be
required to relet for any use or purpose (other than that
specified in the lease), which lessor may reasonably consider
injurious to the premises, or to any lessee which lessor may
reasonably consider objectionable.
B. Relet all or part of the premises alone or in conjunction with
other properties for a term longer or shorter than the term of
this lease upon any reasonable terms and conditions, including
the granting of some rent free
16 - Lease
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occupancy or other rent concession.
28.5 In the event of termination on default, lessor shall be entitled to
recover immediately without waiting until the due date of any future
rent or until the date fixed for expiration of the lease term the
following amounts as damages:
A. Any excess of (a) the value of all lessee's obligations under
this lease, including the obligation to pay rent from the date of
default until the end of the term, over (b) the reasonable rental
value of the premises for the same period figured as of the date
of default, the net result to be discounted to the date of
default at a reasonable rate not exceeding 8% per annum.
B. The reasonable costs of re-entry and reletting, including,
without limitation, the costs of any cleanup, refurbishing,
removal of lessee's property and fixtures, any other expense
occasioned by lessee's failure to quit the premises upon
termination and to leave them in the required condition, any
remodeling costs, attorney's fees, court costs, broker
commissions and advertising costs.
C. The loss of reasonable rental value from the date of default
until a new lessee has been or with the exercise of reasonable
efforts, could have been secured.
28.6 The foregoing remedies shall be in addition to and shall not exclude
any other remedy available to lessor under applicable law.
29. SURRENDER OF PREMISES: Upon the expiration of the lease term or
earlier termination on account of default, lessee shall deliver all keys to
lessor and surrender the premises in first class condition, normal wear and tear
excepted, and broom clean. Alterations constructed by the lessee with permission
from the lessor shall not be removed or restored to the
17 - Lease
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original condition unless the terms of permission for the alterations so
require. Depreciation and wear from ordinary use for the purpose for which the
premises were let need not be restored, but all repairs and maintenance shall be
completed to the latest practical date prior to such surrender.
The lessee's obligations shall be subordinate to the provisions of
paragraph 18 related to destruction.
30. ATTORNEY'S FEES: In the event that arbitration or legal action is
brought by either of the parties hereto to enforce any of their rights or
remedies hereunder, the party prevailing in such arbitration or action shall be
entitled to recover such additional sum from the other party as the arbitrator
or court may adjudge reasonable for costs and attorney's fees in such
arbitration or action whether in arbitration, trial court or on appeal.
31. NOTICES: Any notice required or permitted under this lease shall be
given when actually delivered or when deposited in the United States certified
mail, postage prepaid, addressed as follows.
To lessor: Rogue Valley Health Services
2650 Siskiyou Blvd.
Medford, Oregon 97504
To lessee: Medford Clinic
555 Black Oak Dr.
Medford, Oregon 97504
or to such other address as may be specified from time to time by either of the
parties in writing.
18 - Lease
<PAGE>
32. SUCCESSION: Subject to the above stated limitations on transfer of
lessee's interest, this lease shall be binding upon and inure to the benefit of
the parties, their respective successors and assigns.
33. PARTIAL INVALIDITY: If any term, provision, covenant or condition of
this lease should be held by arbitration or a court of competent jurisdiction to
be invalid, void or unenforceable, the remainder of this lease shall continue in
full force and effect and shall in no way be affected, impaired or invalidated
thereby.
34. OPTION TO PURCHASE: Provided that lessee is not in default under any
of the terms and conditions of this lease, lessee may purchase the building and
the appurtenant easement set forth in Article 12 of this lease as follows:
34.1 If lessee decides to purchase the building, upon exercise of said
option the parties shall execute a ground lease for the real property,
which lease is set forth as exhibit "C" attached hereto. The rent for
the property included in the ground lease shall be calculated pursuant
to the addendum (Exhibit B) to this lease.
34.2 During the first five years of the initial lease term, the price for
purchase of the building shall be the actual cost of the building as
determined pursuant to Article 1.2 and as set forth in the Addendum
(Exhibit B) to this lease, including deferred rent, if any.
Thereafter, the purchase price shall be the then fair market value of
the building, but in no event less than the total cost of the
building, including deferred rent, if any.
34.3 If the lessee elects to purchase the building and provided that the
financing obtained by lessee to purchase the building does not exceed
80% of the then combined value of the building, the site and the site
19 - Lease
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improvements, then lessor shall join with lessee and execute a first
deed of trust for the purpose of encumbering its interest in the land
in order for lessee to secure said financing. In addition, lessor
shall subordinate to any refinancing of the building by lessee, upon
these same terms and conditions.
34.4 Lessor shall not be liable for lessee's debt to finance the purchase
of the building. Lessor's sole obligation is the subordination of its
interest in the property. Lessor shall be entitled to receive all
notices of default under the note or security instrument and shall
have the rights to cure any such default. In the event lessor incurs
any expense in connection with the curing of any default of lessee,
the expense so incurred shall become immediately due and payable from
lessee to lessor upon demand, as additional rent under the ground
lease.
34.5 Lessee shall exercise any option to purchase under this article by
delivering to lessor, in writing, notice of its exercise of a purchase
option not less than 180 days prior to the end of the then current
lease term. The writing shall specify lessee's proposed purchase
price.
34.6 The terms of sale shall be payment in full in cash at closing. Closing
shall occur within 90 days from the date of the written notice of
lessee's exercise of its option.
34.7 In the event that the parties cannot agree upon the fair market value
for the purchase price of the building or total project under this
article, the matter shall be resolved by arbitration as set forth in
Article 36 below.
35. RIGHT OF FIRST REFUSAL TO REPURCHASE BUILDING: If
lessee has purchased the building and lessee thereafter receives a bona fide
offer to purchase the building by a third party, lessor shall have a right of
first refusal to repurchase the building upon the same terms and conditions as
the bona fide offer received by lessee. This right of first refusal shall
remain open for a period of 30 days following lessee's
20 - Lease
<PAGE>
delivery to lessor, in writing, of the bona fide offer it has received and
intends to accept. No offer shall be considered a bona fide offer unless it is
set forth in writing containing the basic terms and conditions of the proposed
purchase, and unless it intends to accept said offer.
36. ARBITRATION: Any and all disputes which may arise
between the parties concerning the interpretation or enforcement of this lease
shall be submitted to and resolved by arbitration. Either party may request
arbitration and appoint an arbitrator in writing. The other party shall then
choose and appoint an arbitrator in writing. The two arbitrators shall then
choose a third arbitrator, with appropriate qualifications, without delay. If
the choice of the second or third arbitrator is not made within 10 days of the
date of the writing naming the prior arbitrator, then either party may apply to
the presiding judge in the Circuit Court for Jackson County to appoint the
required arbitrator. The arbitration shall then proceed according to Oregon
statutes governing arbitration, and the award of the arbitrators may assess the
costs of arbitration, including attorney and other expert fees, against either
party.
If the dispute involves the value of the building, the two (2) initial
arbitrators shall be MAI appraisers with practices in Jackson County, Oregon and
the third (3) arbitrator shall be an MAI appraiser with at least 10 years
experience in the
21 - Lease
<PAGE>
valuation of medical facilities.
37. MEMORANDUM OF LEASE: The parties shall execute an appropriate
memorandum of this agreement for purposes of recordation in Jackson County,
Oregon.
38. CONTINGENCY: Lessee owns an existing clinic building
known as the Medford Clinic located at 1005 and 1025 East Main in Medford,
Oregon. If this existing facility has not been disposed of to the satisfaction
of lessee prior to commencement of the project, lessee shall have the right to
immediately terminate this lease. In the event lessee elects to terminate in
accordance with this article, lessee shall pay to lessor the costs of the
project incurred through the date of termination.
39. MERGER: This present lease agreement is intended to be a complete and
full agreement with regards to all matters contained herein. Any prior
agreements or writings between the parties with respect to the subject matter of
this lease shall be deemed merged into this agreement and shall be of no further
force and effect except for the prior construction agreement described in
paragraph 1 above.
40. SALE OF LAND: Lessor has adopted a policy that it will not sell any
of its RVMC campus land to private persons. In the event that policy changes
and lessor sells, offers to sell or gives an option for the purchase of any of
said land, lessee shall have the same right to purchase or obtain an option to
purchase at the same price per square foot and upon
22 - Lease
<PAGE>
the same or similar terms. A purchase of the land would include the easements
granted pursuant to Article 12 of this lease.
41. ADDITION TO OFFICE BUILDING:
41.1 The parties have reserved sufficient property (Parcel 2) to allow for
the construction of an addition to the office building. Lessee
contemplates an expansion of the building to allow for the practice of
additional physicians. The proposed location of the addition to the
building and related necessary improvements are shown on exhibit "C".
41.2 In the event lessee desires to have the addition constructed and it
has not purchased the improvements pursuant to article 34 of this
lease it shall notify RVHS in writing. RVHS then has the option to
construct the addition in the same style and consistent in quality to
the rest of the building.
41.3 The initial rent shall be computed to reflect the cost of construction
in the same manner as provided in article 1.2 and the Addendum
(Exhibit B) of this lease. Thereafter, the rent for the addition
shall be increased or decreased in the same manner as provided in
article 5.2 of this lease.
41.4 If the addition is constructed by lessee, lessor shall cooperate with
lessee to allow lessee to obtain financing for the construction.
Lessor will grant the lender a first security interest, agree to
subordinate or join in the execution of a first security agreement for
the real property to secure lessee's obligations. The rent of the
ground lease shall be adjusted to reflect the occupancy of parcel 2
and shall be in an amount as determined pursuant to article 5.8 of
this lease.
41.5 The term of the lease including any extension options shall coincide
with the lease term of the office building.
41.6 Upon termination of this lease, if lessee has constructed an addition
to the office building, and to the extent that lessor has not
otherwise paid for construction of said addition, lessor agrees to pay
lessee an amount equal to any increase of the value
23 - Lease
<PAGE>
of the total building project which may have resulted from the
addition paid for by lessee. The amount of any such enhanced value, if
any, shall be agreed upon by the parties. If the parties are unable to
agree then the matter shall be arbitrated in accordance with Article
36.
(a) If the enhanced value is in excess of any debt then owing by
lessee as a result of the addition, lessor shall have the
following options for paying lessee for the enhanced value:
1. Lessor may assume the then existing debt for the addition
and pay the excess of the enhanced value over the assumed
debt to lessee in cash.
2. Lessor may pay lessee cash for the full enhanced value in
exchange for lessee paying off all debt and clearing title
to the improvements from any obligation incurred by lessee.
3. Lessor may pay the enhanced value in installments by paying
25% of the amount as a down payment in amortizing the
remainder over five years at an interest rate equal to the
then prime lending rate charged by local lending
institutions. All such installments paid by lessor shall be
applied by lessee to reduce the existing debt until such
time as the debt is paid in full.
(b) If the then existing debt incurred for the improvements exceeds
the enhanced value, lessor shall have the following options:
1. Pay cash for the enhanced value all of which will be applied
to the existing debt. In such event, lessee shall continue
to be liable for the remaining debt and shall indemnify,
defend and hold lessor harmless therefrom.
2. Assume the remaining debt with lessee to pay lessor the
amount of excess of the debt over the enhanced value in
cash.
IN WITNESS WHEREOF, the parties have executed this
24 - Lease
<PAGE>
instrument as of the day and year first hereinabove written.
ROGUE VALLEY HEALTH SERVICES, INC.,
an Oregon nonprofit corporation
By: /s/ L.R. Merryman 9/13/89
------------------------------------
L. R. Merryman, President
Lessor
Medford Clinic, P.C., an Oregon
nonprofit corporation
By: /s/ Paul Foster
------------------------------------
Paul Foster, President
25 - Lease
<PAGE>
Commencing at a point which bears South 00 DEG. 04' 30" East, 293.79 feet
and North 89 DEG. 42' 00" West, 32.00 feet from the Southwest corner of
Donation Land Claim No. 59, Township 37 South, Range 1 West, Willamette
Meridian, Jackson County, Oregon; said point being the Southeast corner of
the property described in Jackson County Instrument No. 68-07309; thence
North 00 DEG. 04' 30" West 6.00 feet; thence North 89 DEG. 42' 00" West 25.16
feet to a point on the Northerly right-of-way line of Barnett Road; thence
along said Northerly right-of-way line North 89 DEG. 42' 00" West 1558.73
feet to the Easterly line of the property described in Volume 443, page 400
of the Official Deed Records of Jackson County, Oregon; thence leaving said
Northerly right-of-way line along said Easterly line North 00 DEG. 04' 15"
West 80.00 feet; thence South 89 DEG. 42' 00" East 24.00 feet; thence North
00 DEG. 04' 15" West 130.00 feet; thence North 89 DEG. 42' 00" West 24.00
feet; thence North 00 DEG. 04' 15" West 336.57 feet; thence North 89 DEG. 42'
00" West 200.00 feet to the Easterly right-of-way line of Black Oak Drive;
thence along said Easterly right-of-way line North 00 DEG. 04' 15" West 71.48
feet to the POINT OF BEGINNING ; thence North 89 DEG. 55' 45" East 180.00
feet; thence North 00 DEG. 04' 15" West 120.00 feet; thence North 74 DEG.
55' 45" East 43.00 feet; thence North 89 DEG. 55' 45" East 338.00 feet;
thence North 00 DEG. 04' 15" West 108.00 feet; thence South 89 DEG. 5' 45"
West 100.00 feet; thence North 00 DEG. 04' 15" West 35.00 feet; thence
South 89 DEG. 55' 45" West 38.00 feet; thence North 00 DEG. 04' 15" West
182.51 feet to the Southerly right-of-way line of Siskiyou Boulevard; thence
along said Southerly right-of-way line, South 89 DEG. 58' 43" West 421.54
feet to the aforementioned Easterly right-of-way line of Black Oak Drive;
thence South 00 DEG. 04' 15" East along said Easterly right-of-way line
457.00 feet to the point of beginning. Containing 4.07 acres, more or less.
------------------
REGISTERED
PROFESSIONAL
LAND SURVEYOR
------------------
/s/Douglas C. McMahan
------------------
OREGON
July 18, 1980
Douglas C. McMahan
No. 1913
----------------
Douglas C. McMahan
Hoffbuhr & Associates, Inc.
Medford Replacement Clinic
Parcel I
November 16, 1989
A-2
<PAGE>
Commencing at a point which bears South 00 DEG. 04' 30" East, 293.79 feet
and North 89 DEG. 42' 00" West, 32.00 feet from the Southwest corner of
Donation Land Claim No. 59, Township 37 South, Range 1 West, Willamette
Meridian, Jackson County, Oregon; said point being the Southeast corner of
the property described in Jackson County Instrument No. 68-07309; thence
North 00 DEG. 04' 30" West 6.00 feet; thence North 89 DEG. 42' 00" West 25.16
feet to a point on the Northerly right-of-way line of Barnett Road; thence
along said Northerly right-of-way line North 89 DEG. 42' 00" West 1558.73
feet to the Easter1y line of the property described in Volume 443, page 400
of the Official Deed Records of Jackson County, Oregon; thence leaving
said Northerly right-of-way line along said Easterly line North 00 DEG.
04' 15" West 80.00 feet; thence South 89 DEG. 42' 00" East 24.00 feet; thence
North 00 DEG. 04' 15" West 130.00 feet; thence North 89 DEG. 42' 00" West
24.00 feet; thence North 00 DEG. 04' 15" West 336.57 feet, thence North 89
DEG. 42' 00" West 200.00 feet to the Easterly right-of-way line of Black Oak
Drive; thence along said Easterly right-of-way line North 00 DEG. 04' 15"
West 71.48 feet; thence North 89 DEG. 55' 45" East 180.00 feet to the POINT
OF BEGINNING; thence North 00 DEG. 04' 15" West 120.00 feet; thence North 74
DEG. 55' 45" East 43.00 feet; thence North 89 DEG. 55' 45" East 338.00 feet;
thence South 00 DEG. 04' 15" East 150.00 feet; thence South 89 DEG. 55' 45"
West 300.00 feet; thence North 76 DEG. 43' 24" West 81.74 feet to the point
of beginning. Containing 1.28 acres, more or less.
------------------
REGISTERED
PROFESSIONAL
LAND SURVEYOR
------------------
/s/Douglas C. McMahan
------------------
OREGON
July 18, 1980
Douglas C. McMahan
No. 1913
----------------
Douglas C. McMahan
Hoffbuhr & Associates, Inc.
Medford Replacement Clinic
Parcel II
November 16, 1989
A-2
<PAGE>
EXHIBIT B
ADDENDUM TO ARTICLE 1.2
OF
RVHS/MEDFORD CLINIC LEASE
1. Project Costs (indirect and direct) = $7,353,925
2. Project Value (for purpose of computing monthly lease pmts):
Initial Commitment - $6,500,000 @ 7.9% = $513,500.00 rent/yr.
Additional - 700,000 @ 9.0% = 63,000.00 rent/yr.
Additional - 153,925 @ 9.0% = 13,853.25 rent/yr.
---------- -----------
TOTAL $7,353,925 $590,353.25 rent/yr.
Initial Monthly Rent $590,353.25
-----------
12 = $49,196.10 per month
3. Land Value (Parcel I only) and Calculation of Monthly Lease Payments -
177,361.15 s.f. x $3.80 per s.f. = $673,972 x 7.9% = $53,243.82 divided by
12 months = $4,436.98 per month
4. Total Initial Monthly Rent of the Project (Sum of #1 and #3 above) =
$53,633.08
5. Purchase Price of Building (during first five years of lease) = Building
Project Value of $7,353,925
6. Occupancy date of the building by lessee 12/17/90 .
-------------
<PAGE>
LEASE AGREEMENT
THIS AGREEMENT, made and entered into this 1st day of December, 1993, by
and between SOUTHERN OREGON FAMILY PRACTICE BUILDING PARTNERSHIP (SOFPBP),
hereinafter referred to as "Lessor", and MEDFORD CLINIC P.C., hereinafter
referred to as "Lessee",
W I T N E S S E T H:
WHEREAS, Lessor is the owner of the real property described on Exhibit
"A", attached hereto and by this reference incorporated herein and made a
part hereof, and
WHEREAS, Lessor desires to lease said premises to Lessee upon the terms
and conditions hereinafter set forth, now, therefore,
In consideration of the terms and obligations set forth herein, the parties
hereto agree as follows:
1. PREMISES: Lessor hereby leases to Lessee and Lessee hereby leases
from Lessors the premises described on Exhibit "A".
2. TERM: The term of this lease shall be three years commencing December
1, 1993, and terminating November 30, 1996, unless sooner terminated as
hereinafter provided.
3. OPTION TO EXTEND: Provided Lessee is not in default in its performance
of this Lease, it shall have the exclusive right and option to extend this
Lease for one successive and additional three (3) year term upon all of the
same terms and conditions as are set forth herein.
If Lessee elects to exercise its option for the additional three-year
period, it shall do so by giving Lessors written notice not less than 60 days
prior to the end of the initial term of this
Lease - 1
<PAGE>
Lease.
If the Lessee is in default in the performance of this Lease, or, if for
any other reason, this Lease is terminated or expires, Lessee's option to
extend shall lapse and be void.
4. RENT: Lessee agrees to pay as rent for the leased premises the
following:
4.1 The base rent shall be $4,368 per month and shall be payable on
the first day of each month in advance at such place as may be
designated by Lessor.
4.2 Except as hereinafter provided, Lessee agrees to pay as
additional rent all taxes, assessments, utilities, insurance,
interior and exterior maintenance and repairs and all other
incidental costs connected with the premises.
4.3 Rent for the renewal term, if applicable, shall be equal to the
base rent adjusted to reflect the increase in the cost of living
(not to exceed 4% per year or a total of 12%) for the period
between December 1, 1993, and November 30, 1996. Cost of living
shall be based on the "Consumer Price Index - Pacific Cities
Oregon State Department of Labor." The computation shall be based
on the index number for the City of Portland entitled "All Items."
4.4 If Lessor is not then in default, upon termination of this lease
for any reason, Lessee shall continue to pay rent for a period
not to exceed 18 months from the date of termination, provided
that Lessor diligently pursues a sale of the property at no more
than the appraised value, and provided further that Lessor shall
not be required to reduce the sale price for the property by more
than 15% of the appraised value in order to effect a sale. In the
event the property does not sell within said 18 month period,
Lessee shall continue to pay rent in an amount equal to the total
of the monthly mortgage payments, real property taxes and fire
and extended insurance premiums. Lessee's obligation to pay such
reduced rent payments shall not exceed 18 months. Thereafter,
until the property is sold, Lessee shall pay 1/2 of said reduced
rent monthly.
5. REAL PROPERTY TAXES: Lessee shall pay all real property
Lease - 2
<PAGE>
taxes and assessments levied or assessed against the premises promptly as the
same become due and payable, and shall promptly provide Lessor with proof of
such payment. Upon receipt of the real property tax statement each year,
Lessor shall mail Lessee a copy of same. Lessee shall provide Lessor with a
copy of the receipt for payment of such taxes.
6. FIRE INSURANCE AND CASUALTY COVERAGE: Lessor agrees to keep the
improvements on the premises fully insured against loss by fire or casualty,
with extended coverage, in an amount not less than the full insurable
replacement value of said premises. There shall be affixed to any policy of
insurance a loss payable clause showing the interests of Lessor and Lessee
under the terms of this Lease Agreement. Lessor shall obtain an endorsement
from the insurance carrier that any such policy shall not be cancelled
without 20 days prior written notice to Lessee. In the event of fire or other
casualty, the insurance proceeds, if any, shall be used to repair or replace
as needed to restore the premises. Lessee shall reimburse Lessor for all
insurance premiums within 10 days after receiving a copy of the receipt for
payment of such premiums.
7. MAINTENANCE AND REPAIR OF LEASED PREMISES: Lessee shall be 100%
responsible for all repairs and maintenance in connection with the leased
premises, of any kind or nature whatsoever, including all repairs and
maintenance in connection with the building, the ground or other improvements
thereon. Lessee will maintain the premises in good repair and in the same
quality and
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<PAGE>
architectural style that presently exists.
8. REPAIRS BY LESSOR: If Lessee fails or refuses to make repairs which
are required by the terms of this Agreement, Lessor may make the repairs and
charge the actual costs of repairs to Lessee. Such expenditures shall be
reimbursed by the Lessee on demand together with interest at the rate of ten
percent (10%) per annum from the date of the expenditure. Except in an
emergency creating an immediate risk of personal injury or property damage,
Lessor may not perform repairs which are the obligation of the Lessee and
charge the Lessee for the resulting expense unless at least fifteen days
before work is commenced Lessee is given notice in writing outlining with
reasonable particularity what repairs are required, and Lessee fails within
that time to initiate such repairs in good faith.
9. UTILITIES AND PERSONAL PROPERTY TAX: Lessee agrees to pay all water,
gas, electricity, heat, telephone and all other utilities or services
rendered to the premises, and all such utilities shall be placed in Lessee's
name alone. Lessee further agrees to pay as the same become due and payable
all personal property taxes which may be levied or assessed against any
property belonging to Lessee. If Lessee fails or refuses to pay for such
utilities, Lessor may pay for and charge the cost of said utilities to
Lessee. In such event, Lessee shall reimburse Lessor on demand together with
interest at the rate of 10% per annum from the date of the expenditure.
10. INSPECTION OF PREMISES: Lessor shall have the right to
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<PAGE>
inspect the leased premises at any reasonable time or times.
11. USE OF THE PREMISES: Lessee agrees that:
11.1 It will not make any unlawful or offensive use of the premises.
11.2 It will not permit or allow the accumulation of litter or flammable
material upon the premises.
11.3 It shall comply with all applicable laws and governmental regulations
in storing, discharging or transporting hazardous wastes or toxic
substances from or on the premises. Hazardous wastes and toxic
substances are any wastes or substances defined as such and regulated
by any governmental body or agency.
11.4 It shall use said premises for the practice of medicine or medically
related field and shall make no other use of the property without
first obtaining the written consent of Lessor.
12. LIENS AND ENCUMBRANCES: Except with respect to activities for which
Lessor is responsible, Lessee shall pay as due all claims for work done on or
for services rendered or material furnished to the premises for or on behalf
of Lessee and shall keep the premises free from any liens arising therefrom.
If Lessee fails to pay any such claims or to discharge any lien, Lessor may
do so and collect the costs as additional rent. Any amounts so added shall
bear interest at the rate of 10% per annum from the date expended by Lessor and
shall be payable on demand. Such action by Lessor shall not constitute a
waiver of any right or remedy which Lessor may have on account of Lessee's
default.
Lessee may withhold payment of any claim in connection with a good faith
dispute over the obligation to pay so long as Lessor's property interests are
not jeopardized. If a lien is filed as a result of nonpayment, Lessee shall,
within 30 days after knowledge
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<PAGE>
of the filing, secure the discharge of the lien or deposit with Lessor's cash
or a sufficient corporate surety bond or other security satisfactory to
Lessor in an amount sufficient to discharge the lien plus any costs,
attorney's fees and other charges which could accrue as a result of a
foreclosure or sale under the lien.
13. LIABILITY INSURANCE: During the term of the Lease and any renewal
thereof, Lessee shall carry public liability and property damage insurance on
the premises in the amount of $1,000,000.00 public liability and $100,000.00
property damage. Lessor shall be named as an additional insured on such
policy of insurance and a memorandum copy of the policy shall be furnished by
Lessee to Lessor. Lessee shall obtain an endorsement from the insurance
carrier that any such policy shall not be cancelled without 20 days prior
written notice to Lessor.
14. INDEMNIFICATION: Lessee shall indemnify and defend Lessor from any
claim, loss or liability, including any attorney fees and costs arising out
of or related to any activity of Lessee, its agents, servants, customers,
subtenants or licensees on the premises or any condition of the premises or
any other property located on the premises unless the claim, loss or
liability is caused by the act or failure to act of one of the individual
partners of Lessor, and Lessee is unable to insure against such claim, loss
or liability.
15. WAIVER OF SUBROGATION RIGHTS: Each party hereby waives the
subrogation rights, if any, of each and all of its insurance
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<PAGE>
carriers and each party shall take such steps as necessary to inform all such
carriers of this Agreement and to have riders, if necessary, placed upon any
insurance policies to carry the provisions of this Paragraph into effect.
16. DAMAGE OR DESTRUCTION OF THE PREMISES:
If the leased premises are damaged and the damage can be repaired within
90 days, the property shall be repaired by Lessor at Lessor's expense.
Repairs shall be accomplished with all reasonable dispatch subject to
interruptions and delays from labor disputes and matters beyond the control
of Lessor and shall be made with as little interference with the use of the
premises by Lessee as is reasonably practical.
If the leased premises are destroyed or damaged and the damage cannot be
repaired within 90 days, either party may elect to terminate this lease as of
the date of damage by notice given to the other party in writing not more
than 45 days following the date of damage. In such event, all rights and
obligations of the parties shall cease as of the date of termination, and
Lessee shall be entitled to reimbursement of prepaid amounts paid by Lessee
and attributable to the anticipated termination. If neither party elects to
terminate, Lessor shall proceed to restore the leased premises to
substantially the same form as prior to the damage or destruction. Work shall
be commenced as soon as reasonably possible and thereafter without
interruption except for work stoppages on account of labor disputes and
matters not under control of Lessor.
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<PAGE>
Rent shall be abated during the repair of any damage to the extent the
premises are untenable, except that there shall be no rent abatement where
damage occurred as the result of the fault of Lessee.
17. QUIET ENJOYMENT: If and as long as Lessee pays the rent herein
specified and performs all of Lessee's obligations hereunder, Lessee shall
quietly enjoy the premises.
18. LESSOR'S REPRESENTATION AND INDEMNIFICATION OF THE PARTIES: To the
best of Lessor's knowledge, Lessor has no knowledge of any hazardous waste or
toxic substances having been stored or discharged upon the premises. Lessor
shall indemnify and save Lessee harmless from any liability caused by any
hazardous waste or toxic substance having been stored or discharged upon the
premises prior to the effective date of this Agreement. Lessee shall
indemnify and save Lessor harmless from any liability caused by any hazardous
waste or toxic substance having been stored or discharged upon the premises
by Lessee after the effective date of this Agreement.
19. ALTERATIONS: Lessee may not make any alterations or additions to the
premises without first obtaining the written consent of Lessor, which consent
shall not be unreasonably or arbitrarily withheld. Any additions or
alterations to the premises shall become part of the real property and belong
to the owner thereof.
20. EMINENT DOMAIN - TOTAL TAKING: If a condemning authority takes all
the premises or portions sufficient to render the
Lease - 8
<PAGE>
remaining premises reasonably unsuitable for the use which the Lessee was
then making of the premises, the Lease shall terminate as of the date the
title vests in the condemning authorities. Lessor shall be entitled to all of
the proceeds of condemnation, except tenant improvements and the Lessee shall
have no claim against Lessor as a result of the condemnation.
21. EMINENT DOMAIN - PARTIAL TAKING: If a portion of the premises is
condemned and Paragraph 20 does not apply, the Lease shall continue on the
following terms:
21.1 Lessor shall be entitled to all of the proceeds of condemnation
except tenant improvements and Lessee shall have no claims
against Lessor as a result of the condemnation.
21.2 Lessor shall proceed as soon as reasonably possible to make
such repairs and alterations to the premises as are necessary
to restore the remaining premises to a condition as comparable
as reasonably practicable to that existing at the time of the
condemnation. Lessor may, but shall not be required to, perform
alterations prior to the actual taking after the portion to be
taken has been finally determined. Rent shall be abated to the
extent the premises are untenantable during the period of
alteration and repair.
21.3 After the date on which title vests in the condemning authority
or an earlier date on which alterations and repairs are
commenced by Lessor to restore the balance of the property in
anticipation of taking, the rent shall be reduced
commensurately with the reduction in value of the premises, as
an economic unit, on account of the partial taking. If the
parties are unable to agree upon the amount of reduction of
rent, the amount of such reduction shall be determined by
arbitration as set forth in Paragraph 35 below.
22. EMINENT DOMAIN - SALE IN LIEU OF CONDEMNATION: Sale of all or part
of the premises to a purchaser with the power of
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<PAGE>
eminent domain in the face of a threat or probability of exercise of the
power shall be treated as a taking by condemnation.
23. ASSIGNMENT: Lessee shall not assign this Lease or sublease the
premises without the prior written consent of Lessor which consent shall not
be unreasonably withheld.
24. TIME OF ESSENCE: Time is of the essence of this Lease and waiver
by either party in enforcing any of the terms and conditions hereof shall not
constitute a waiver of such party's right to insist upon strict compliance
with such terms and conditions in the future.
25. DEFAULT: The following shall be events of default:
25.1 Failure of Lessee to pay any rent, including additional rent,
within ten days after written notice from Lessor that said rent
is delinquent. Lessor shall not be required to give Lessee
notice of failure to pay rent more than once in any calendar
year.
25.2 Failure of Lessee to comply with any term or condition or
fulfill any obligation of the Lease (other than the payment
of rent including additional rent), within thirty days after
written notice by Lessor specifying the particulars in which
Lessor claims that Lessee is in default. Lessee shall not be
in default under this provision if Lessee commences action to
cure any such default within 30 days after receiving notice
from Lessor, provided Lessee pursues such cure with due
diligence.
25.3 Insolvency of Lessee; an assignment by Lessee for the benefit
of creditors; the filing by Lessee of a voluntary petition
in bankruptcy; an adjudication that Lessee is bankrupt or the
appointment of a receiver for the properties of Lessee; the
filing of an involuntary petition of bankruptcy and failure of
Lessee to secure a dismissal of the petition within 30 days
after filing; attachment of or the levying of execution on the
leasehold interest and failure of Lessee to secure discharge
of the attachment or release of the levy of
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<PAGE>
execution within ten days.
26. REMEDIES ON DEFAULT:
26.1 In the event of a default, the Lease may be terminated at the
option of the Lessor by notice in writing to Lessee. The
notice may be given before or within the running of any grace
period for default and may be included in a notice of failure
of compliance given pursuant to Paragraph 25.2. If the
premises are abandoned by Lessee in connection with a
default, termination shall be automatic and without notice.
26.2 If the Lease is not terminated by Lessor upon default, Lessor
shall be entitled to recover all damages from Lessee for any
default.
26.3 If the Lease is terminated for any reason, Lessee's liability
to Lessor for damages shall survive such termination and the
rights and obligations of the parties shall be as follows:
A. Lessee shall surrender and vacate the premises
immediately, remove any property of Lessee, including any
fixtures which Lessee is required to remove at the end of the
Lease term and perform any cleanup, alterations or other work
required to leave the premises in the condition required
under Paragraph 27 below, and shall deliver all keys to
Lessor.
B. Lessor may re-enter, take possession of the premises and
remove any persons or property by legal action or by self
help with the use of reasonable force and without liability
for damages.
26.4 Following re-entry Lessor may relet the premises and in that
connection may:
A. Make any suitable alterations or refurbish the premises,
or both, or change the use of the premises, but Lessor
shall not be required to relet for any use or purpose
(other than that specified in the Lease), which Lessor may
reasonably consider injurious to the premises, or to any
Lessee which Lessor may reasonably consider objectionable.
Lease - 11
<PAGE>
B. Relet all or part of the premises alone or in conjunction
with other properties for a term longer or shorter than the
term of this Lease upon any reasonable terms and conditions,
including the granting of some rent free occupancy or other
rent concession.
26.5 In the event of termination on default, Lessor shall be entitled
to recover immediately without waiting until the due date of
any future rent or until the date fixed for expiration of the
Lease term the following amounts as damages:
A. Any excess of (a) the value of all of Lessee's obligations
under this Lease, including the obligation to pay rent from
the date of default until the end of the term, over (b) the
reasonable rental value of the premises for the same period
figured as of the date of default, the net result to be
discounted to the date of default at a reasonable rate not
exceeding 8% per annum.
B. The reasonable costs of re-entry and reletting, including,
without limitation, the costs of any cleanup, refurbishing,
removal of Lessee's property and fixtures, and other expense
occasioned by Lessee's failure to quit the premises upon
termination and to leave them in the required condition, any
remodeling costs, attorney's fees, court costs, broker
commissions and advertising costs.
C. The loss of reasonable rental value from the date of default
until a new Lessee has been or with the exercise of
reasonable efforts, could have been secured.
26.6 The foregoing remedies shall be in addition to and shall not
exclude any other remedy available to Lessor under applicable
law.
27. SURRENDER OF PREMISES: Upon the expiration of the lease term or
earlier termination on account of default, Lessee shall deliver all keys to
Lessor and surrender the premises in first class condition, normal wear and
tear excepted, and broom clean.
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<PAGE>
Alterations constructed by the Lessee with permission from the Lessor shall
not be removed or restored to the original condition unless the terms of
permission for the alterations so require. Depreciation and wear from
ordinary use for the purpose for which the premises were let need not be
restored, but all repairs and maintenance shall be completed to the latest
practical date prior to such surrender.
28. ATTORNEY'S FEES: In the event that arbitration or legal action is
brought by either of the parties hereto to enforce any of their rights or
remedies hereunder, the party prevailing in such arbitration or action shall be
entitled to recover such additional sum from the other party as the arbitrator
or court may adjudge reasonable for costs and attorney's fees in such
arbitration or action whether in arbitration, trial court or on appeal.
29. NOTICES: Any notice required or permitted under this Lease shall
be given when actually delivered or when deposited in the United States
certified Mail, postage prepaid, addressed as follows:
To Lessor: Southern Oregon Family Practice, Building Partnership
P.O. Box 1300
241 Maple Street
Ashland, OR 97520
To Lessee: 555 Black Oak
Medford, OR 97504
or to such other address as may be specified from time to time by either of the
parties in writing.
30. SUCCESSION: Subject to the above stated limitations on transfer of
Lessee's interest, this Lease shall be binding upon and inure to the benefit of
the parties, their respective successors
Lease - 13
<PAGE>
and assigns.
31. PARTIAL INVALIDITY: If any term, provision, covenant or condition of
this Lease should be held by arbitration or a court of competent jurisdiction
to be invalid, void or unenforceable, the remainder of this Lease shall
continue in full force and effect and shall in no way be affected, impaired
or invalidated thereby.
32. ARBITRATION: Any and all disputes which may arise between the
parties concerning the interpretation or enforcement of this Lease shall be
submitted to and resolved by arbitration. Either party may request
arbitration and appoint an arbitrator in writing. The other party shall then
choose and appoint an arbitrator in writing. The two arbitrators shall then
choose a third arbitrator, with appropriate qualifications, without delay. If
the choice of the second or third arbitrator is not made within 10 days of
the date of the writing naming the prior arbitrator, then either party may
apply to the presiding judge in the Circuit Court for Jackson County, Oregon,
to appoint the required arbitrator. The arbitration shall be conducted
according to the commercial arbitration rules of Commercial Arbitration
Association, and the award of the arbitrators may assess the costs of
arbitration, including attorney and other expert fees, against either party.
If the dispute involves the value of the property, the two initial
arbitrators shall be MAI appraisers with practices in Jackson County, Oregon,
and the third arbitrator shall be an MAI appraiser with at least 10 years
experience in the valuation of
Lease - 14
<PAGE>
medical facilities. The value shall be the average of the three appraisals.
In any event the decision of the arbitrators shall be final and binding on
the parties.
33. MEMORANDUM OF LEASE AND OPTION: The parties shall execute an
appropriate memorandum of this agreement for purposes of recordation in
Jackson County, Oregon.
34. MERGER: This Lease Agreement is intended to be a complete and full
agreement concerning all matters contained herein. Any prior agreements or
writings between the parties with respect to the subject matter of this Lease
shall be deemed merged into this Agreement and shall be of no further force
and effect.
IN WITNESS WHEREOF, the parties have executed this instrument as of the
day and year first hereinabove written.
LESSOR: LESSEE:
SOUTHERN OREGON FAMILY MEDFORD CLINIC, P.C.
PRACTICE BUILDING PARTNERSHIP
By: /s/ Bruce Johnson, M.D. By: /s/ Bruce Van Zee, M.D.
--------------------------------- ---------------------------------
Partner
TITLE President
------------------------------
By: /s/ Jerome Nitzberg, M.D.
---------------------------------
Partner
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<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
Beginning at a point 173.25 feet West of the northeast corner of the
Northwest Quarter of the Southeast Quarter of Section 5 in the Township 39
South, Range 1 East of the Willamette Meridian in Jackson County, Oregon,
thence South 244.20 feet to the north line of Maple Street in the City of
Ashland, Oregon; then West, along said street line, 138.27 feet to the
southeast corner of tract described in Volume 236 page 52 of the Deed Records
of Jackson County, Oregon; thence North 0 DEG. 30' 00" West, along the east
line of said tract, 244.20 feet to the northeast corner thereof; thence East
138.27 feet to the point of beginning.
<PAGE>
AGREEMENT
This Agreement is made and entered into as of this 21st day of January,
1996, by and between MERLE WEST MEDICAL CENTER, a not-for-profit corporation
organized under the laws of the State of Oregon, (hereinafter "MWMC"), and
Medford Clinic, P.C., an Oregon professional corporation located at 555 Black
Oak Drive, Medford, Oregon (hereinafter "Clinic").
RECITALS
1. Whereas MWMC is tax exempt under the federal tax laws of the United
States of America and operates an acute-care, general hospital located at
2865 Dagget Street, Klamath Falls, Oregon; and,
2. Whereas Clinic is a successful highly regarded medical clinic having a
dialysis program of its own; and,
3. Whereas MWMC has a commitment to provide local in-center outpatient
hemodialysis services to end-stage renal disease (ESRD) patients residing
within its service area; and,
4. Whereas Clinic through its physicians, management team, and staff,
possesses the experience and expertise to manage with quality and efficiency
the daily operations of such an outpatient hemodialysis facility/program; and,
5. Whereas MWMC has committed itself, as a method of fulfilling its
charitable purposes, establishing and promoting the existence of an in-center
outpatient hemodialysis center for the treatment of ESRD patients to ensure
that such hemodialytic care is available to the community; and,
6. Whereas an exclusive Agreement between MWMC and Clinic will benefit MWMC
and the community served by MWMC; and
7. Whereas MWMC is prepared to enter into an exclusive management Agreement
with Clinic and Clinic is agreeable to such management Agreement;
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises and covenants hereinafter contained, the parties agree as follows:
RESPONSIBILITIES OF CLINIC
8. BASIC AGREEMENT BY CLINIC:
8.1 Clinic agrees to provide management and dialysis services to
ESRD patients in the Klamath Falls service area.
<PAGE>
8.1.1 Clinic shall be responsible for providing all outpatient,
home based dialysis services, which includes home training, peritoneal
dialysis, and home hemodialysis until December 31, 1996; all new patients
admitted for service on or before December 31, 1996 shall remain patients of
Clinic, unless the patient requests otherwise.
8.1.1.1 Clinic shall pay the sum of $75.00 per half day for
use of MWMC facilities to provide services to Clinic's home-based dialysis
patients as referenced in Section 8.1.1 above.
8.1.2 After December 31, 1996, all new home-based dialysis patients
shall be considered patients of MWMC.
8.1.2.1 MWMC agrees to negotiate with Clinic to contract for
the provision of home dialysis services, including patient training and
on-going support for this group of patients.
8.2 Clinic shall provide an appropriate level of staffing based on
patient need at MWMC's West Dialysis Center (hereinafter "WDC") and agrees to
decrease staffing based on decreased patient load, to the extent that patient
care and safety are not compromised or adversely affected.
8.3 Clinic agrees that MWMC's payment for staffing services rendered
under the terms of this Agreement shall be based on the actual hours worked
at MWMC.
8.4 Clinic agrees that until a nephrologist resides in the Klamath Falls
area, or at such future time as by mutual Agreement of the parties, all ESRD
patients with ESRD related conditions who require in-patient
treatment/hospitalization directly related to ESRD or other related ESRD
conditions in the MWMC Service area will receive their care, including
in-patient hospitalization acute dialysis services in Medford, Oregon.
8.5 Clinic shall employ physicians who are licensed to practice medicine
in the State of Oregon, and who specialize in the practice of nephrology.
8.6 Clinic shall provide physician services to MWMC patients, and shall
be available on site according to pre-approved schedule mutually satisfactory
to both parties.
8.6.1 A Clinic physician shall be on site at the WDC facility a
minimum of one (1) day per month.
8.6.2 A Clinic physician shall be available for consultation via
telephone/facsimile 24 hours per day at all times a Clinic physician is not
on site at the WDC facility.
AGREEMENT - 2
<PAGE>
8.6.3 Clinic shall recruit a Nephrologist who will reside in the
Klamath Falls community at the time that the ESRD patient load at WDC reaches
45 patients (combined total of home-based and in-center dialysis patients).
8.6.4 MWMC agrees that, during the initial term or any subsequent
renewal term of this Agreement, it will neither recruit a nephrologist or
other qualified physician of its own to Klamath Falls to competitively care
for the dialysis needs of the end-stage renal disease patients, nor will it
retain any physician other than a Clinic nephrologist to fill the position of
Medical Director of its dialysis program.
8.7 Clinic shall provide the services of a physician director (Medical
Director) to MWMC.
8.7.1 The Medical Director shall provide medical supervision of all
services provided by Clinic under the terms and conditions of this Agreement.
8.7.2 The Medical Director shall fulfill the responsibilities
delineated in Section 405.2161 of Subpart U, Conditions for Coverage of
Suppliers of End-Stage Renal Disease (ESRD) Services, 42 CFR Chapter IV
(12/1/94). (See attached Exhibit A).
8.8 The Medical Director and all physicians performing services on
behalf of Clinic under the terms of this Agreement shall maintain on an
unrestricted basis the following:
8.8.1 Unlimited licensure as a physician in the State of Oregon;
8.8.2 Federal DEA number;
8.8.3 Medical Staff membership (Courtesy status) and appropriate
clinical privileges at Merle West Medical Center;
8.8.4 Medical Staff membership in good standing at another Oregon
licensed in-patient facility; and
8.8.5 Board eligibility or certification by the American Board of
Nephrology.
8.9 Clinic shall provide non-physician patient care and clinical support
staff who are properly trained and present in adequate numbers to meet the
needs of the patients, including those arising from medical emergencies.
8.9.1 All individuals provided under this paragraph shall be
employees of Clinic.
AGREEMENT - 3
<PAGE>
8.10 Personnel which Clinic agrees to provide include the following:
8.10.1 Registered nurse(s), including an on-site manager;
8.10.2 Patient care technician(s);
8.10.3 Machine/maintenance technician(s); and,
8.10.4 Reuse technician(s).
8.11 Clinic agrees in addition to the medical, clinical and technical
services provided by patient care/clinical support staff as referenced above
to provide the following consultative services including but not limited to:
8.11.1 Program administration;
8.11.2 Product and equipment evaluation and standardization; and,
8.11.3 Quality assurance/improvement activities to meet MWMC/JCAHO
standards.
8.12 Clinic shall provide an adequate and appropriate level of
orientation, and continuing education for Clinic personnel who provide
services at MWMC subject to MWMC review and in accordance with established
MWMC protocols and criteria for the provision of quality service.
8.13 Individuals other than physicians who provide services on behalf of
the Clinic under the terms of this Agreement shall be appropriately trained,
licensed, and/or certified to perform the duties assigned to them.
8.13.1 The training, licensure and/or certification of such
individuals shall be based upon a mutual Agreement with MWMC and shall meet
all local, state and federal statutory or rule requirements.
8.13.1.1 Clinic shall act promptly to correct any
personnel problems identified by MWMC Liaison or Clinic site manager whether
the issue identified is related to staff clinical competence, employee
performance or overall performance.
8.13.1.2 MWMC Liaison agrees to confer with Clinic's
Clinical Services Director regarding Clinic employees. MWMC Liaison shall,
after said consultation, retain the right, for good cause shown, to refuse to
allow any Clinic employee to perform services under the terms of this
agreement at the WDC facility.
AGREEMENT - 4
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8.13.2 Clinic shall provide MWMC upon request evidence of any
individual's training, licensure, and/or certification.
8.13.3 Clinic shall be responsible for reporting to MWMC the
outcome of any disciplinary or corrective action taken with any Clinic
personnel provided under the terms of this Agreement within five (5) working
days of the action.
8.13.4 Clinic shall accept for training as soon as appropriate and
feasible any individual, identified by either party needing training, and for
whom the parties mutually agree training is appropriate.
8.14 Clinic shall provide WDC specific, written policies and procedures
pertaining to patient care as described in Section 405.2136 (f) of Subpart U,
Conditions for Coverage of Suppliers of End-Stage Renal Disease (ESRD)
Services, 42 CFR Chapter IV (12/1/94). (See Exhibit B as attached).
8.14.1 All policies provided by Clinic shall be WDC specific and
all such written policies and procedures shall be in Agreement with MWMC's
standard policies, procedures and personnel practices.
8.14.2 Such policies shall be in accordance with the criteria
described in Section 405.2136 (d) of Subpart U, Conditions for Coverage of
Suppliers of End-Stage Renal Disease (ESRD) Services, 42 CFR Chapter IV
(12/1/94). (See Exhibit C as attached).
8.15 Clinic shall oversee the implementation of a quality
assurance/quality improvement program that is consistent with established
MWMC programs and shall participate in MWMC's quality assurance and
utilization review programs as deemed appropriate and necessary by MWMC.
8.16 Clinic shall perform duties related to the delivery of outpatient,
in-center hemodialysis services and other dialysis-related services, as
mutually agreed upon by MWMC and Clinic.
8.17 Clinic is responsible for the timely maintenance and repair of all
dialysis machines and related equipment.
8.17.1 Clinic machine/maintenance and reuse technician(s) shall
promptly notify MWMC liaison of all repair parts and materials needed to
comply with the terms of this Agreement.
8.18 Clinic shall maintain profession liability insurance covering
physicians, nursing personnel, and technicians as
AGREEMENT - 5
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provided for in the current MWMC Medical Staff By-Laws, rules and regulations.
8.18.1 Clinic shall furnish MWMC with a current certificate of
Professional Liability Insurance for all physicians/licensed professionals for
malpractice prior to commencing practice at MWMC.
8.18.2 Clinic shall ensure that each physician/licensed
professional provided under the terms of this Agreement has tail insurance
coverage for all professional services performed under the terms of this
Agreement.
8.18.2.1 A copy of the certificate of tail insurance shall be
provided to MWMC at the termination of this Agreement, any renewal period, or at
the time the physician/licensed professional provided by the Clinic under the
terms of this Agreement terminates their employment with Clinic.
8.18.2.2 In the event a physician/licensed professional,
provided by Clinic, under the terms of this Agreement, fails to obtain the
required tail insurance, Clinic agrees to indemnify MWMC for any and all damages
which are assessed against MWMC arising out of activities which would have been
covered by such tail insurance.
8.19 The Clinic shall include in all contracts with the physicians and
other licensed professional personnel who will be provided by the Clinic under
the terms of this Agreement a clause for indemnification of MWMC such as
follows:
- Clinic agrees to indemnify and hold harmless MWMC from and against any
and all liability for claims of whatever kind or character arising out of:
-- Clinic provided Physician/Licensed Professional Personnel's failure
to comply with any statutes, regulations, ordinances, or licensing
requirements for the provision of hemodialysis services; and
-- Negligence or any other tortious conduct of any Clinic provided
Physician/Licensed Professional Personnel relating to the provision of
hemodialysis services or other medical care services under the terms
of this Agreement; and
-- Disputes arising out of any contractual commitments between the
Clinic and Physician/Licensed Professional Personnel provided by the
Clinic under the terms of the Clinic's Agreement with MWMC; and,
-- Clinic provided Physician/Licensed Professional
AGREEMENT - 6
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Personnel's failure to obtain consent pursuant to Oregon law for such
treatments as provided.
-- Clinic provided Physician/Licensed Professional Personnel's failure
to comply with applicable state and federal income tax laws.
8.20 Clinic shall not bill or collect directly for any professional or
technical fees from any patient or third-party payor for dialysis or dialysis
related services provided to MWMC patients.
RESPONSIBILITY OF MWMC
9. BASIC AGREEMENT OF MWMC:
9.1 MWMC shall be responsible for providing the WDC facility for the
provision of outpatient, in-center hemodialysis services.
9.2 MWMC shall provide non-clinical support personnel.
9.2.1 These individuals shall be responsible for patient
reception, clerical functions, purchasing and delivering, and business office
functions, including but not limited to billing and collections.
9.3 MWMC shall provide clinical support in the service areas of social
work and dietary services.
9.4 MWMC agrees to make available to Clinic at the MWMC premises all
medical supplies, equipment, furnishings and facilities reasonably necessary for
the provision of quality, efficient care of MWMC patients.
9.5 MWMC agrees to make available all office supplies, equipment, and
furnishings reasonably necessary for staff and physicians to conduct the
business of a dialysis program on site at the MWMC facility.
9.6 MWMC shall maintain on an uninterrupted basis the following services:
9.6.1 Housekeeping/janitorial services;
9.6.2 Laundry/linen services;
9.6.3 Communication services, including
telephone/fax/data lines;
9.6.4 All building and landscaping maintenance;
9.6.5 Garbage/hazardous waste disposal; and,
9.6.6 All utilities.
9.7 MWMC shall keep and maintain the building/premises, the
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equipment which is non-dialysis related, and furnishings in good working order
and repair.
9.7.1 MWMC shall be responsible for providing on a timely basis
all necessary parts and materials related to the dialysis machines and related
equipment upon timely notification and request from Clinic's machine/maintenance
and reuse technician(s).
9.7.1.1 MWMC's timely response for the provision of
necessary parts and materials will be as expected and required only when
notification by Clinic personnel has been given on a timely basis.
9.8 MWMC shall be responsible only for procurement of the parts for
equipment repair as it relates to the dialysis machinery and all medically
related equipment, and not for the repair itself.
9.9 MWMC shall compensate Clinic for its services as follows:
9.9.1 MWMC shall compensate Clinic for management services and
ongoing consultative availability for clinical, technical, regulatory, and
managerial matters that are dialysis related in the amount of $950.00 per month
for each of the first twelve (12) months of this Agreement, or $11,400.00 per
annum for the first year of this Agreement.
9.9.1.1 A formula with supporting criteria for adjusting
the management fee after the first twelve (12) months of this Agreement shall
be developed and mutually agreed upon by the parties no later than September
30, 1996.
9.9.2 MWMC shall compensate clinic for physician/medical director
services in the amount of $2,000.00 per month for each of the first twelve
(12) months of the Agreement, or $24,000.00 per annum for the first year of
this Agreement.
9.9.2.1 A formula with supporting criteria for adjusting
the medical director fee after the first twelve (12) months of this Agreement
shall be developed and mutually agreed upon by the parties no later than
September 30, 1996.
9.9.2.2 MWMC shall compensate Clinic for all non-physician
patient care and clinical support services provided by Clinic staff to MWMC.
Compensation shall be made on the basis of actual hours worked by Clinic
staff.
9.9.2.3 MWMC shall be responsible for paying only for the
actual number of hours staff work on location at the WDC facility.
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9.9.2.4 The parties agree that only upon mutual consent
will the operating days of the WDC facility be increased beyond the start-up
schedule of Monday, Wednesday and Friday.
9.9.2.5 Clinic shall be responsible for submitting to MWMC
all billing statements in a format acceptable to MWMC.
9.9.2.5.1 Clinic shall be responsible to submit
all billing statements to MWMC each month no later than fifteen (15) days
after the end of the preceding month in order for the Clinic to receive
payment from MWMC on a timely basis as defined in Section 9.11 below.
9.9.2.5.2 The parties shall be responsible to
notify one another within a reasonable time prior to any anticipated need to
increase or decrease staffing levels and to provide the party so notified
with a rationale to justify said requested increase/decrease in staffing.
9.9.2.5.3 All billing statements shall identify,
by name, each staff member and the number of hours actually worked at WDC.
9.10 MWMC shall compensate Clinic for the start-up expenses incurred to
train the facility's new staff, dating from the first day of training until the
day the MWMC facility becomes operational only upon Clinic's submission of an
appropriate billing statement submitted in accordance with Section 8.21 and its
subsections above.
9.11 MWMC shall compensate Clinic within thirty (30) days from receipt of
Clinic's monthly billing statement.
9.11.1 MWMC liaison shall have five (5) days upon receipt of
Clinic's monthly billing statements to dispute any charges in writing to
Clinic's Clinical Services Manager in Medford, Oregon.
9.11.2 All disputed charges will be resolved by mutual agreements
of Clinic's Clinical Services Manager and MWMC's liaison.
GENERAL PROVISIONS
10. TERM OF THIS AGREEMENT:
10.1 This Agreement is to take effect on January 22, 1996, and is to
continue in force until midnight, January 21, 2001.
10.2 This Agreement may be renewed for one (1) successive three-year term,
upon mutual agreement of the parties.
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10.2.1 Clinic shall give notice to MWMC one hundred and twenty
(120) days prior to the end of the first term, or any successive term, of
this Agreement of the desire to negotiate an additional term.
10.2.2 All terms and conditions of the original Agreement as
commencing on January 22, 1996 shall be in full force and effect in any
renewal agreement unless specifically altered in a written addendum signed by
both parties, attached and incorporated into the original agreement.
11. TERMINATION OF AGREEMENT:
11.1 The obligations of the parties to this Agreement shall terminate
upon the occurrence of any of the following:
11.1.1 Failure of Clinic or any of the physicians/licensed
professional personnel provided under the terms of this agreement to qualify
or obtain licensure in Oregon, appointment to the MWMC Medical Staff, (which
shall not be unreasonably withheld) medical malpractice insurance coverage or
to satisfy any other contingency contained within this document.
11.1.2 Material breach by MWMC at the option of Clinic unless the
breach is curable and is cured within thirty (30) consecutive calendar days
following notice pursuant to Section 32 below.
11.1.3 Material breach of contract by Clinic at the option of MWMC
unless the breach is curable and is cured within thirty (30) consecutive
calendar days following notice pursuant to Section 32 below.
11.1.4 This Agreement may be terminated by MWMC IMMEDIATELY
WITHOUT NOTICE in the event MWMC in good faith determines that Clinic or any
of its physicians, licensed professional staff or agents is conducting
themselves in an unprofessional, unethical, or fraudulent manner, which MWMC
believes discredits or is detrimental to its reputation, character, and
standing within the community.
11.1.5 This Agreement may be terminated by MWMC IMMEDIATELY
WITHOUT NOTICE in the event MWMC, in good faith, determines that Clinic or
any of its physicians, licensed professional personnel or agents are not
providing adequate patient care, or that the safety of patients is
jeopardized by Clinic's continued provision of services under the terms of
this Agreement.
11.1.6 This Agreement may be terminated by
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Clinic immediately without notice in the event Clinic in good faith
determines that MWMC or any of its licensed professional staff or agent is
conducting themselves in an unprofessional, unethical, or fraudulent manner,
which Clinic believes discredits or is detrimental to its reputation,
character, and standing within the community.
11.1.7 This Agreement may be terminated by Clinic immediately
without notice in the event Clinic, in good faith, determines that MWMC or
any of its licensed professional personnel or agents are not providing
adequate care, or that the safety of patients is jeopardized by MWMC's
continued provision of services under the terms of the Agreement.
12. EFFECT OF TERMINATION:
12.1 Upon termination of this Agreement, for any reason, neither party
shall have any further obligation hereunder except:
12.1.1 Obligations accruing prior to the date of termination;
12.1.2 Obligations, promises, or covenants contained herein which
are expressly made to extend beyond the term of this agreement (e.g. tail
coverage, etc.);
12.1.3 Clinic agrees that all physicians/licensed professionals
provided under the terms of this Agreement shall resign from membership on
the medical staff and relinquish all clinical privileges and forego any
redress allowed in the medical staff bylaws (i.e. Hearing and Appeals).
13. FINAL ACCOUNTING:
13.1 Within ninety (90) days after the term of this Agreement, or any
renewal period, Clinic shall submit a final billing statement for all
outstanding amounts owed under the terms of this Agreement.
14. ACCESS TO FINANCIAL RECORDS:
During the term of this Agreement or any renewal of this Agreement,
Clinic agrees to keep and maintain accounting records reflecting all fees
billed for professional services and collections received from all sources of
income in connection with Clinic's performance under the terms of this
Agreement. Clinic further agrees to bring in a designated officer or employee
of MWMC to inspect such records at the end of each month or at other
convenient times during the term of this Agreement so long as guarantee
advance payments are being made, if reasonably requested by MWMC.
AGREEMENT - 11
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15. RECORDS:
15.1 For the purpose of implementing Section 1861(v)(l)(I) of the
Social Security Act, as amended, and any written regulations thereto, Clinic
agrees to comply with the following statutory requirements governing the
maintenance of documentation to verify the cost of services rendered under
this Agreement.
15.1.1 Until the expiration of four (4) years after the furnishing
of such services pursuant to such contract, Clinic shall make available, upon
written request to the Secretary of HHS, or upon request of the Comptroller
General of the U.S., or any of their duly authorized representatives, the
contract, and books, documents, and records of Clinic that are necessary to
certify the nature and extent of such costs; and,
15.1.2 If Clinic carries out any of the duties of the contract
through a subcontract with a value or cost of TEN THOUSAND AND NO/100 DOLLARS
($10,000.00) or more over a 12-month period, with a related organization,
such subcontract shall contain a clause to the effect that until the
expiration of four (4) years after the furnishing of such services pursuant
to such subcontract, the related organization shall make available, upon
written request to the Secretary, or upon request to the Comptroller General,
or any of their duly authorized representatives, the subcontract, and books,
documents, and records of such organization that are necessary to verify the
nature and extent of such costs.
15.1.3 If Clinic is requested to disclose any books, documents, or
records relevant to this Agreement for the purpose of an audit or
investigation, Clinic shall notify MWMC of the nature and scope of such
request and shall make available, upon written request of MWMC, all such
books, documents, or records.
15.1.4 In the event of any breach of this paragraph by Clinic or
any of his subcontractors, MWMC shall have the right to terminate this
Agreement after ten (10) days' notice.
15.1.5 Clinic shall indemnify and hold harmless MWMC in the event
that any amount of reimbursement is denied or disallowed by the reimbursement
programs because of the failure of Clinic or any of its related
subcontractors to comply with the obligations stated in Paragraphs 15.1.1 and
15.1.2 of this section. Such indemnity shall include, but not be limited to,
the amount of reimbursement denied or disallowed, plus any interest,
penalties, and legal costs.
15.1.6 This section is effective as of the effective date of this
agreement, and pertains to all records that have or should have been
maintained on or after that date.
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15.1.7 This section pertains solely to the maintenance and
disclosure of specified records and shall have no effect upon the right of
the parties to this Agreement to make assignments or delegations.
16. INDEPENDENT CONTRACTOR:
In the performance of the work, duties, and obligations devolving upon
Clinic, any of its subcontractors, employees, or agents, under this
Agreement, it is mutually understood and agreed that Clinic, its
subcontractors, employees, or agents, is at all times acting and performing
as an independent contractors in providing any and all services under the
terms of this Agreement. MWMC shall neither have nor exercise any control or
direction over the methods by which Clinic, its subcontractors, employees, or
agents, shall perform their work. The sole interest and responsibility of
MWMC is to ensure that the services offered by the WDC facility shall be
performed and rendered in a competent, efficient, and satisfactory manner.
All applicable provisions of law and other rules and regulations of any and
all governmental authorities relating to licensure and regulation of
physicians, licensed professionals, and hospitals, as well as the
recommendations of the Joint Commission on Accreditation of Health Care
Organizations, shall be fully complied with by all parties hereto. None of
the provisions of this Agreement shall be interpreted to conflict with the
intent of the parties that the legal status of Clinic shall at all times be
that of an independent contractor.
17. INSURANCE, SALARIES WORKERS' COMPENSATION, TAXES, PENSIONS, ETC.:
Neither Clinic nor its employees shall be deemed employees of MWMC for
any purpose whatsoever, and neither shall be eligible to participate in any
benefit program provided by MWMC for its employees. Clinic shall be
exclusively responsible for the payment of all wages/salaries, taxes,
withholding payments, fees and professional liability insurance premiums; and
these items will be considered reasonable practice expenses. Contributions to
insurance, pension or other deferred compensation plans including, but not
limited to, Workers' Compensation and Social Security obligations and
penalties are not considered reasonable practice expenses for purposes of
this Agreement. Clinic shall be responsible for the filing of all necessary
documents, forms, and returns pertinent to all of the foregoing. Clinic shall
not bring and shall hold harmless and provide MWMC with a defense against any
and all claims that MWMC is responsible for the payment or filing of any of
the foregoing payments, withholdings, contributions, taxes, and documents and
returns, including but not limited to Social Security taxes and employer
income tax withholding obligations.
AGREEMENT - 13
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18. LIMITATIONS OF RESPONSIBILITY:
18.1 Clinic agrees to indemnify and hold harmless MWMC from and against
any and all liability for claims of whatever kind or character arising out of:
18.1.1 Clinic's failure to comply with any statutes, regulations,
ordinances or licensing requirements for the provision of services under the
terms of this Agreement.
18.1.2 Negligence or any other tortious conduct of Clinic and/or
Clinic's personnel or agents relating to the provision of services under the
terms of this Agreement.
18.1.3 Disputes arising out of any contractual commitments
between Clinic and third parties;
18.1.4 Clinic's failure to request from MWMC sufficient equipment
and personnel to provide the services Clinic is obligated to provide under
the terms of this Agreement.
18.1.5 Clinic's failure to obtain informed consent pursuant to
Oregon Law for such treatments as provided.
18.2 Clinic agrees to defend any claims of negligence against the MWMC
based upon allegations of malpractice against the Clinic.
18.3 MWMC agrees to indemnify and hold harmless Clinic from and against
any and all liability for claims of whatever kind of character arising out of:
18.3.1 MWMC's failure to comply with any statutes, regulations,
ordinances or licensing requirements;
18.3.2 Negligence or any other tortious conduct of MWMC's
personnel or agents;
18.3.3 Disputes arising out of any contractual commitments
between MWMC and third parties;
18.4 MWMC agrees to defend any claims of negligence against the Clinic
based upon allegations of malpractice against MWMC, its subcontractors,
employees or agents.
19. SUPERVENING LAW:
The parties recognize that this Agreement at all times is to be subject
to applicable state, local and federal law, including, but not limited to,
The National Health Planning and Resources Development Act of 1974, The
Social Security Act, and the rules, regulations and policy of The Department
of Health and
AGREEMENT - 14
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Human Services, all public health and safety provisions of state law and
regulation, and the rules and regulations of the Health Systems Agency and
the State Certificate of Need Agency. The parties further recognize that the
Agreement shall be subject to amendments in such laws and regulations and to
new regulations such as a new federal or state economic stabilization
program or health insurance program. Any provisions of law that invalidate,
or otherwise are inconsistent with, the terms of this Agreement, or that
would cause one or both parties to be in violation of law, shall be deemed
to have superseded the terms of this Agreement, provided, however, that the
parties shall exercise their best efforts to accommodate the terms and intent
of this Agreement to the greatest extent possible, consistent with the
requirements of law.
20. COOPERATION:
20.1 Both parties agree to the appointment of a specific liaison
personnel who will meet on a quarterly basis, or more frequently as required
to discuss the implementation of the terms of this Agreement.
20.2 For the first term of this Agreement, the Clinic's Liaison person
shall be the Associate Administrator, Medford Clinic, or his designee, the
Clinical Services Manager of the dialysis program at the Medford Clinic.
20.3 The MWMC administrative liaison person shall have the authority to
bring all issues of concern regarding the operation of the dialysis center to
the attention of the Clinic manager and Clinic's Clinical Services Manager in
Medford, Oregon.
20.4 The parties further agree that on a quarterly basis
representatives of the parties shall formally meet to review implementation
of the terms of this Agreement, WDC operations, future planning and other
concerns/issues identified by either party.
20.5 All issues raised by the MWMC liaison personnel and/or the Clinic
liaison and clinical manager shall be resolved by mutual Agreement of the
parties within twenty (20) days of their initial identification or other time
frame as agreed upon by the parties.
20.6 Clinic's Liaison shall provide to MWMC Liaison notification of all
actions taken to resolve any problem identified by MWMC Liaison within five
(5) days of the action.
20.7 Parties agree that upon mutual agreement Clinic staff may become
MWMC staff.
AGREEMENT - 15
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21. CLAUSE HEADING:
The clause headings appearing in this Agreement are for the purpose of
convenience and ready reference. They do not purport to, and shall not be
deemed to, define, limit, or extend the scope or intent of the clauses
to which they appertain.
22. LANGUAGE OF AGREEMENT:
Pronouns used in this instrument shall be construed in accordance with
appropriate gender or neuter and as either singular or plural as the context
requires.
23. PREPARATION OF AGREEMENT:
This instrument shall be construed as though prepared by MWMC and Clinic.
24. INCONSISTENT PROVISIONS:
To the extent possible, the Bylaws, rules and regulations, and policies
of the hospital and this Agreement shall be construed as being consistent
with one another. In the event that consistent construction between this
Agreement and the aforementioned documents is not possible, the provisions of
this Agreement are to be given effect and intended to supersede inconsistent
provisions unless to do so would be unlawful.
25. WARRANTY OF AUTHORITY:
MWMC represents and warrants to Clinic and Clinic warrants to MWMC that
each has the full power and authority to enter into this Agreement.
26. SEVERABILITY:
If any term, covenant, or condition of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable, the remainder of this Agreement and the application of any
term or provision to persons or circumstances, other than those as to which
it is held invalid or unenforceable, shall not be affected thereby; and all
other terms shall be valid and enforceable to the fullest extent permitted by
law, except where to do so would frustrate the purpose of this Agreement.
27. ENTIRETY OF THE AGREEMENT:
This instrument contains the entire Agreement between the parties; and
no statements, writings, promises, or inducements made by either party or an
agent of either party that are not contained in this written Agreement, shall
be valid or binding. This Agreement may not be enlarged, modified, or altered
except
AGREEMENT - 16
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in writing, signed by the parties and endorsed on this Agreement.
28. ASSIGNMENT:
28.1 Nothing contained within this Agreement shall be construed to
permit the assignment or delegation by MWMC or Clinic of any rights, duties,
or obligations hereunder; and such assignment is expressly prohibited, except
as delineated in Paragraphs 28.2 and 28.3 below.
28.2 Nothing contained in this Agreement shall be construed as to
prohibit either party from delegating duties to subcontractors as relates to
any of the obligations for record-keeping, either medical or financial, which
are consistent with either party's professional duty.
28.3 Nothing contained in this Agreement shall be construed as to
prohibit either party from assigning its rights or delegating its duties to a
subsidiary or successor corporation.
29. GOVERNING LAW:
This Agreement is executed in the City of Klamath Falls, State of
Oregon, and shall be construed under the laws of the State of Oregon.
30. CONFIDENTIALITY.
30.1 The parties to this Agreement agree that all terms and conditions
of this Agreement shall be kept confidential except as herein specifically
required by state or federal law.
30.2 The parties shall exercise reasonable efforts to keep the terms
and provisions of this Agreement confidential, and also shall exercise
reasonable efforts not to disclose any of the terms of employee's employment,
salary and benefits to other persons except in response to an order of a
court, governmental demands, or, if necessary, to attorneys, accountants and
auditors, who shall be apprised of this Agreement concerning confidentiality.
30.2.1 Not withstanding paragraph 30.1 and 30.2, neither party shall
have any liability to the other party if for any reason beyond the reasonable
control of either party the terms and conditions of this Agreement shall be
disclosed or otherwise become known to others.
30.2.2 This obligation shall continue in force after the term of this
Agreement, and shall survive any termination of this Agreement.
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31. BENEFIT OF AGREEMENT:
This Agreement shall inure to the benefit of the parties to this
Agreement.
32. NOTICE:
All notices given under this Agreement shall be in writing, and shall be
sent by registered mail to the parties at their respective addresses as given
in the signature block section below.
IN WITNESS HEREOF, the parties hereto have duly executed this Agreement
effective the date first written above.
MERLE WEST MEDICAL CENTER Medford Clinic, P.C.
2865 Daggett St. Address 555 Black Oak Drive
Klamath Falls, OR 97601 Medford, OR 97504-4328
By /s/ DON L. YORK By /s/ Bruce Van Zee, M.D.
--------------------------------- ---------------------------------
Its V.P. Its PRESIDENT
-------------------------------- --------------------------------
By /s/ JON NESS
---------------------------------
Its CEO
--------------------------------
By /s/ TODD WALLENBERG
---------------------------------
Its ASSOCIATE ADMINISTRATOR
--------------------------------
This Agreement approved as to legal sufficiency dated this
14TH day of JUNE, 1996
BOIVIN, JONES, UERLINGS, DiIACONI & ODEN
Attorneys for MWMC
Signed: /s/ BARBARA M. DiIACONI
-------------------------------
Barbara M. DiIaconi
AGREEMENT - 18
<PAGE>
EXHIBIT 10.21
MANAGEMENT AGREEMENT
This MANAGEMENT AGREEMENT ("Agreement") is made and entered into this
1st day of February, 1996, by and between HealthFirst Management Services, Inc.,
an Oregon corporation ("MSO") and HealthFirst Medical Group, P.C., an Oregon
professional corporation ("PC").
RECITALS
WHEREAS, MSO is an Oregon corporation engaged in the business of
negotiating and administering contracts with managed care plans and other third
party payors on behalf of PC and other medical practice entities; and
WHEREAS, PC is engaged in the business of providing medical services
to its patients and such administrative and management services as are necessary
to facilitate the provision of medical services; and
WHEREAS, MSO desires to retain PC to provide medical services and
supporting administrative and management services to fulfill MSO's contractual
obligations to managed care plans and other third party payors; and
WHEREAS, PC and MSO recognize that PC has sole and complete
responsibility for providing medical services to its patients;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained in this Agreement, the parties agree as follows:
1. DUTIES OF PC AND MSO
1.1 GENERAL DESCRIPTION OF SERVICES. PC shall serve as a provider of
medical services. PC will also provide the services of sufficient staff to MSO
to allow it to perform necessary advisory, consulting, management and
administrative services.
1.2 DUTIES OF MSO. MSO will manage PC's relationships with health plans
and its negotiations with health plans, patients and third parties.
1.2.1 MSO will represent PC in negotiations for capitated and other
risk agreements with third party payors including, but not limited to,
HMOs, PPOs, EPOs, self-insured
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employers, employee unions, indemnity carriers, and other health provider
groups (collectively, "Health Plans");
1.2.2 MSO will negotiate agreements with ancillary service
providers.
1.2.3 MSO will assist PC in the resolution of patient complaints,
third party grievances, eligibility requirements, contract changes and
clarifications.
1.2.4 MSO will administer all managed care contracts on behalf of PC
with the stipulation that all decisions regarding the establishment or
maintenance of relationships with Health Plans shall be made by PC in
consultation with MSO.
2. COMPENSATION
In consideration of the services rendered pursuant to this Agreement,
MSO shall compensate PC in the amount and upon the terms agreed upon by the
parties each year.
3. TERM AND TERMINATION
3.1 TERM. The initial term of this Agreement shall commence on February
1, 1996, and shall continue in effect for a period of eleven (11) months unless
sooner terminated pursuant to the terms of this Agreement. Thereafter, this
Agreement shall automatically renew for successive periods of one (1) year each,
unless either party provides notice of their intent not to renew at least 90
days before calendar year-end.
3.2 TERMINATION WITH CAUSE. Notwithstanding the foregoing, either party
shall have the right to terminate this Agreement for cause. In the event either
party terminates this Agreement for cause, termination shall be effective
immediately upon written notice to the other party.
For purposes of this Agreement, "cause" shall be defined as:
(a) Cancellation of PC's insurance pursuant to Section 5.2 herein.
(b) Material breach of any provision of this Agreement and failure to
cure said breach within thirty (30) calendar days after notice of said material
breach from the non-breaching party.
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<PAGE>
(c) Failure to conduct PC's practice in accordance with all applicable
provisions of federal and state laws and regulations and in a professional
manner.
4. COVENANTS OF MSO
4.1 CORPORATE STATUS. MSO covenants and agrees that it is presently, and
shall remain throughout the initial term of this Agreement and each renewal term
thereof, an Oregon corporation in good standing with the Oregon Secretary of
State.
4.2 COOPERATION. MSO covenants and agrees that it will provide PC with all
information required by PC to perform its services under this Agreement. MSO
further covenants that it will grant PC such authority as may be necessary or
desirable to ensure PC's ability to perform its duties under this Agreement.
5. COVENANTS OF PC
5.1 CORPORATE STATUS. PC covenants and agrees that it is presently and
shall remain throughout the initial term of this Agreement and each renewal term
of this Agreement, an Oregon professional corporation in good standing with the
Oregon Secretary of State and that it shall retain complete control over the
manner in which PC conducts its practice.
5.2 INSURANCE. PC covenants and agrees that it will obtain and maintain
in effect throughout the initial term of this Agreement and each renewal term of
this Agreement, policies of professional liability insurance with coverage in
the minimum amount of Two Million Dollars ($2,000,000) per occurrence and Four
Million Dollars ($4,000,000) in the annual aggregate, and comprehensive general
liability insurance in the amount of One Million Dollars ($1,000,000) to insure
it and its employees against liability for damages directly or indirectly
related to the performance of any services provided, the use of any property and
facilities provided by PC and activities performed by MSO. MSO shall be entitled
to receive not less than thirty (30) days written notice of any reduction or
cancellation of such insurance coverage by PC. Evidence of the insurance
policies described above shall be provided to MSO upon request.
5.3 COMPLIANCE WITH LAW. PC represents and warrants that the conduct of
PC's practice at PC's offices has been and will continue to be in accordance
with all applicable provisions of federal and state laws and regulations and in
a professional manner during the initial term of this Agreement and each renewal
term thereof. PC further represents and warrants that all physicians employed by
PC maintain and continue to maintain such professional
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<PAGE>
standards and skills as are in accordance with the standards of ethics and
practice prevailing in the Portland area.
6. RECORDS
6.1 MEDICAL RECORDS. All medical records and documents, including reports,
x-rays, EKGs and other similar types of reports for patients of PC shall be the
property of PC. PC and MSO shall comply with all applicable federal, state and
local laws and regulations pertaining to the confidentiality of medical records.
6.2 BUSINESS RECORDS. All business records, papers and
documents of PC are the property of PC.
7. ARBITRATION
The parties to this Agreement shall attempt to resolve any
controversy or claim arising out of or relating to this Agreement by mutual
cooperation. Any controversy or claim arising out of or relating to this
Agreement which cannot be settled by the mutual cooperation of the parties shall
be settled by binding arbitration in accordance with the rules of the
Arbitration Service of Portland, Inc. (if said arbitration is agreed to by PC's
risk carrier(s)), and judgment upon the award rendered by the Arbitrator or
Arbitrators may be entered in any court. In all cases submitted to arbitration,
the parties agree to share equally the administration fee as well as the
Arbitrator's fee unless otherwise assessed by the Arbitrator. The Arbitrator's
fee shall be advanced by the initiating party subject to final apportionment by
the Arbitrator in his or her award. Each party shall pay its own attorneys'
fees. The parties to this Agreement understand and agree that the Arbitrator
shall not have the right to award punitive damages.
8. INDEPENDENT CONTRACTOR
In the performance of the work, duties and obligations described
under this agreement, it is mutually understood and agreed that each party is at
all times acting and performing as an independent contractor with respect to the
other and that no relationship of employment is created by this Agreement.
Neither party, nor any other person performing services on behalf of either
party pursuant to this Agreement, shall have any right or claim against the
other party under this Agreement for social security benefits, workers'
compensation benefits, disability benefits, unemployment insurance benefits,
health benefits, vacation pay, sick leave or any other employee benefits of any
kind.
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<PAGE>
9. NOTICES
All notices required to be given under this Agreement shall be in
writing and shall be deemed delivered if personally delivered or dispatched by
certified or registered mail, return receipt requested, postage prepaid,
addressed to the parties as follows:
PC: HealthFirst Medical Group, P.C.
265 N. Broadway
Portland, OR 97227
MSO: HealthFirst Management Services, Inc.
265 N. Broadway
Portland, OR 97227
Notice shall be deemed given on the date it is deposited in the mail
in accordance with the foregoing. Any party may change the address to which to
send notices by notifying the other party of such change of address in writing
in accordance with the foregoing.
10. SEVERABILITY
Any terms or provisions of this Agreement which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate any other
term or provisions in this Agreement and such remaining terms and provisions
shall remain in full force and effect.
11. GOVERNING LAW
This Agreement shall be governed by Oregon law.
12. ASSIGNMENT
Neither party shall have the right to assign this Agreement without
the prior written consent of the other party. Any attempted assignment of this
Agreement in contravention of this Article XII shall be null and void and
without any effect whatsoever.
13. SUCCESSORS AND ASSIGNS
Subject to the provisions of this Agreement regarding assignment, the
terms, covenants and conditions contained herein shall be binding upon and inure
to the benefit of the successors and assigns of the parties hereto.
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<PAGE>
14. WAIVER
The waiver by either party to this Agreement of any one or more
defaults, if any, on the part of the other, shall not be construed to operate as
a waiver of any other or future defaults, under the same or different terms,
conditions or covenants contained in this Agreement.
15. CAPTION AND HEADINGS
The captions and headings throughout this Agreement are for
convenience of reference only and shall in no way be held or deemed to be a part
of or affect the interpretation of this Agreement.
16. NO THIRD PARTY BENEFICIARIES
Nothing in this Agreement, expressed or implied, is intended or shall
be construed to confer upon any person, firm or corporation other than the
parties hereto and their respective successors or assigns, any remedy or claim
under or by reason of this Agreement or any term, covenant or condition hereof,
as third party beneficiaries or otherwise, and all of the terms, covenants and
conditions hereof shall be for the sole and exclusive benefit of the parties
hereto and their successors and assigns.
17. AMENDMENT
This Agreement may be modified only by mutual agreement of the parties
provided that, for a modification to be valid, it must be in writing and signed
by both parties.
IN WITNESS WHEREOF, the parties to this Agreement have executed this
Agreement on that day and year set forth above.
PC MSO
HEALTHFIRST MEDICAL GROUP, P.C. HEALTHFIRST MANAGEMENT
SERVICES, INC.
By:/s/ RUSSELL A. DOW, M.D. By: /s/ MATTHEW M. SHELLEY, M.D.
----------------------------- ----------------------------
Its: Chairman Its: President
Date:2-1-96 Date: 1-30-96
--------------------------- ---------------------------
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<PAGE>
PACIFICARE OF OREGON
1996 MEDICAL GROUP SERVICES AGREEMENT
THE CORVALLIS CLINIC, P.C.
TABLE OF CONTENTS
SECTION PAGE
PREAMBLE ............................................................. 1
1. DEFINITIONS .......................................................... 1
2. RELATIONSHIP OF PARTIES .............................................. 7
2.1 - Liability for Obligations ...................................... 7
2.2 - Independent Contractor ......................................... 7
2.3 - Medical Group Indemnification of OMAP and the
State of Oregon ................................................ 8
2.4 - Physician-Patient Relationship ................................. 8
3. DUTIES OF MEDICAL GROUP .............................................. 8
3.1 - Arrange or Provide Covered Services ............................ 8
3.2 - Medical Group Physicians........................................ 8
3.3 - Standards ...................................................... 9
3.4 - Insurance ...................................................... 10
3.5 - Non-Billing of Members ......................................... 10
3.6 - Continuing Care Obligation Following Termination ............... 11
3.7 - Provider Policies and Procedures Manual ........................ 12
3.8 - Credentialing, Recredentialing and Peer Review.................. 12
3.9 - Quality Management and Improvement Program...................... 14
3.10 - Utilization Management Program................................. 15
3.11 - Conformance Requests and Corrective Action..................... 16
3.12 - Catastrophic Case Management................................... 16
3.13 - Claims Processing.............................................. 16
3.14 - Non-Discrimination............................................. 17
3.15 - Reciprocity Agreements......................................... 17
3.16 - Other Contractual Commitments.................................. 18
3.17 - Dissemination of Information................................... 18
3.18 - Medical Group Subcontracts..................................... 18
3.19 - Medical Group Medical Director................................. 19
3.20 - Participate in PacifiCare Risk-Sharing Programs................ 19
3.21 - PacifiCare Point-Of-Service Plan............................... 19
3.22 - Exceptional Needs Care Coordination............................ 19
3.23 - OMAP Requirements ............................................. 19
4. DUTIES OF PACIFICARE..................,............................... 21
4.1 - Administration ................................................. 21
4.2 - Benefit Information ............................................ 21
4.3 - Assist Medical Group............................................ 21
4.4 - Provision of Data............................................... 21
4.5 - Eligibility Lists............................................... 21
4.6 - Credentialing, Quality Improvement and Utilization
Management Programs............................................. 21
4.7 - Medical Director................................................ 22
4.8 - Services Rendered to Ineligible Persons ........................ 22
4.9 - Medical Group Subcontracts...................................... 22
4.10 - Limitation Upon Termination of Hospital........................ 22
4.11 - Assignment of Members.......................................... 23
4.12 - Insurance ..................................................... 23
4.13 - Services Provided By Publicly Funded Agencies ................. 23
<PAGE>
TABLE OF CONTENTS (CONTINUED)
5. COMPENSATION.......................................................... 23
5.1 - Capitation Payments............................................. 23
5.2 - Additional Payments ............................................ 23
5.3 - Collection of Copayments........................................ 24
5.4 - Capitation Adjustments.......................................... 24
5.5 - Changes in Accepted Treatment .................................. 25
5.6 - Special Conditions for Emergency Services....................... 25
5.7 - OMAP Hold Harmless Provision ................................... 25
5.8 - Coordination of Benefits ....................................... 26
5.9 - Collection of Charges from Third Parties........................ 26
6. TERM AND RENEWAL OF AGREEMENT ....................................... 27
6.1 - Term............................................................ 27
6.2 - Negotiation..................................................... 27
7. TERMINATION
7.1 - Termination of Agreement without Cause ......................... 27
7.2 - Termination by Medical Group for Cause ......................... 27
7.3 - Termination by PacifiCare for Cause ............................ 28
7.4 - Termination of HCFA Agreement of Participation in Secure
Horizons ....................................................... 28
7.5 - Termination of Medicaid Agreement or Participation in
PacifiCare Medicaid Plan ....................................... 29
7.6 - Notification of OMAP of Amendment or Termination ............... 29
7.7 - Repayment Upon Termination...................................... 29
7.8 - Termination Not An Exclusive Remedy............................. 29
8. RECORDS, CONFIDENTIALITY, DATE COLLECTION AND RIGHT TO INSPECT
RECORDS............................................................... 29
8.1 - Maintenance of Records.......................................... 29
8.2 - Right To Inspect ............................................... 30
8.3 - Confidentiality of Records ..................................... 31
8.4 - Encounter Data ................................................. 31
8.5 - Financial Statements ........................................... 31
8.6 - Transfer of Copying of Records upon Termination ................ 32
9. GRIEVANCE AND APPEALS PROCEDURE AND DISPUTE RESOLUTION ............... 32
9.1 - Member Grievances and Appeals .................................. 32
9.2 - Member Claims Against Medical Group or Medical Group
Physicians ..................................................... 32
9.3 - Payment Disputes Involving Medical Group and Referral
Providers ...................................................... 32
9.4 - Denied Services................................................. 33
9.5 - Review Committee................................................ 34
9.6 - Quality Improvement Committee .................................. 34
9.7 - Arbitration..................................................... 35
10. NOTICE ............................................................... 35
11. CONFIDENTIALITY ...................................................... 36
11.1 - Information Confidential and Proprietary to PacifiCare......... 36
11.2 - Information Confidential and Proprietary to Medical Group...... 36
11.3 - Confidentiality of this Agreement.............................. 37
12. MISCELLANEOUS PROVISIONS ............................................. 37
12.1 - Protection of Member........................................... 37
12.2 - Transfer of Members............................................ 37
12.3 - Governing Law ................................................. 37
12.4 - Amendments or Modifications ................................... 38
12.5 - Assignment .................................................... 39
12.6 - Solicitation of PacifiCare Members of Employer Groups.......... 39
12.7 - Solicitation of Medical Group Personnel........................ 40
<PAGE>
TABLE OF CONTENTS (CONTINUED)
12.8 - Incorporation of Provider Manual and Exhibits.................. 40
12.9 - Entire Agreement .............................................. 40
12.10 - Other Agreements.............................................. 40
12.11 - Provisions Separable.......................................... 40
12.12 - Waiver of Breach.............................................. 40
12.13 - No Third Party Beneficiary.................................... 41
12.14 - Binding on Successors......................................... 41
12.15 - Interpretation................................................ 41
12.16 - Attorneys' Fees and Costs..................................... 41
12.17 - Headings...................................................... 41
Signature Page........................................................ 41
Schedule of Attachments............................................... 42
Exhibit A - Covered Services.......................................... 43
Exhibit B - Benefits Matrix........................................... 64
Exhibit C - Capitation Payments....................................... 67
Exhibit D - Individual Stop-Loss Program ............................. 70
Exhibit E - Hospital Control Program ................................. 73
Exhibit F - Prescription Services Program ............................ 78
Exhibit G - PacifiCare Point-of-Service Plans......................... 80
Exhibit H - Delegation of Credentialing, Recredentialing
and Peer Review........................................... 86
Exhibit I - Delegation of Quality Improvement ........................ 95
Exhibit J - Delegation of Utilization Management and Review........... 99
Exhibit K - Delegation of Claims Payment..............................102
Exhibit L - Medical Group Service Area................................103
Exhibit M - Access Guidelines.........................................104
<PAGE>
PACIFICARE OF OREGON, INC.
MEDICAL GROUP SERVICES AGREEMENT
This MEDICAL GROUP SERVICES AGREEMENT ("Agreement") is entered into as
of the Effective Date set forth on the signature page of this Agreement by
and between PACIFICARE OF OREGON, INC., an Oregon corporation ("PacifiCare")
and THE CORVALLIS CLINIC ("Medical Group"), with reference to the following
facts:
RECITALS
A. PacifiCare is a licensed health care service contractor in the State
of Oregon that operates various prepaid health service plans, including
commercial, Medicare and Medicaid plans, that arranges for the delivery of
comprehensive health care services through a health care delivery system to
persons eligible to receive benefits under, and enrolled as Members in, the
PacifiCare Health Plan as defined herein.
B. PacifiCare desires to establish a network of qualified health care
providers, including Medical Group and its Medical Group Physicians, for the
purpose of arranging or providing health care services to Members of
the PacifiCare Health Plan.
C. Medical Group is duly organized, qualified and/or licensed in the
State in which it is located to arrange or provide health care
services through physicians and other health professionals and technicians
employed or under contract with Medical Group, all of whom are appropriately
licensed to practice their professions in the State.
D. Medical Group desires to participate in PacifiCare's prepaid
health service delivery system by providing Medical Services and arranging for
the provision of Hospital Services to Members of the PacifiCare Health Plan in
coordination with PacifiCare, its Members and Participating Hospitals.
E. PacifiCare and Medical Group deem it in their best interests to
enter into this renewable Agreement whereby Medical Group agrees to arrange or
provide Medical Services and Hospital Services to Members.
NOW THEREFORE, in consideration of the promises and mutual covenants
contained herein, the parties agree to the terms and conditions
stated in this Agreement.
1. DEFINITIONS
Whenever used in this Agreement, the following terms shall have the
definitions contained in this Article 1:
1.1 AGREEMENT - is this PacifiCare Medical Group Services Agreement and
any exhibits, attachments and/or amendments hereto.
1.2 ANCILLARY SERVICES - are Covered Services, other than Medical
Services or Hospital Services, such as laboratory, x-ray, physical therapy,
health education, medical social services, home health care, mental health and
acute alcohol and drug abuse services, which Participating Providers shall
provide to Members upon Referral by a Participating Medical Group and the prior
approval of PacifiCare.
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1.3 CAPITATION PAYMENTS - are fixed monthly payments made to Medical
Group by PacifiCare on a prepaid basis for the Capitated Services to be provided
to Members under this Agreement.
1.4 CAPITATED SERVICES - are Covered Services for which Medical Group
receives a Capitation Payment from PacifiCare and assumes full financial
responsibility within the limits of this Agreement, as identified in the
Benefits Matrix applicable to each PacifiCare Health Plan as set forth in
Exhibits B1 through B3.
1.5 CATASTROPHIC CASE - is any single medical condition, including
complications arising from such medical condition, where the total cost of
Covered Services, regardless of payment source, is expected to exceed the stop-
loss limit per condition per calendar year of Covered Services.
1.6 CERTIFIED FINANCIAL STATEMENTS - means an income statement, a
balance sheet and a statement of cash flow of Medical Group, prepared in
accordance with generally accepted accounting principles and certified by the
chief financial officer, president or other authorized representative of Medical
Group to present fairly, in all material respects, the financial position of
Medical Group at the date of the balance sheet and for the period covered by the
income statement and the statement of cash flow.
1.7 COMMERCIAL MEMBER - is an individual who is enrolled as a Member in
a PacifiCare Commercial Plan pursuant to a Subscriber Agreement. Unless
otherwise specified, references in this Agreement to Members shall include
Commercial Members.
1.8 CONFORMANCE REQUEST - is a written request made by PacifiCare to
Medical Group to correct the performance of a Medical Group Physician to conform
to the provisions of this Agreement where such performance does not comply with
PacifiCare Quality Improvement or NCQA standards or applicable state and federal
law.
1.9 COPAYMENTS - are amounts pursuant to a PacifiCare Health Plan which
may be charged to Member by a Participating Provider at the time of the
provision of Covered Services which are in addition to the Capitation Payments
made to Medical Group by PacifiCare.
1.10 COVERED SERVICES - are the Medical Services, Hospital Services,
Ancillary Services and Emergency Services which Members are entitled to receive,
when Medically Necessary, under a specific PacifiCare Health Plan. Covered
Services under each applicable PacifiCare Health Plan are summarized in Exhibits
A1 through A3.
1.11 ELIGIBILITY LIST - is a list of all Members for which Medical Group
is responsible for arranging or providing Covered Services.
1.12 EMERGENCY SERVICES - are Medically Necessary inpatient or
outpatient Covered Services provided inside or outside the Service Area to a
Member as the result of an unforeseen injury, illness or medical condition
manifesting itself by acute symptoms of sufficient severity such that the
absence of immediate medical attention could reasonably be expected to result
in: (a) placing the Member's health in serious jeopardy, (b) serious impairment
of bodily functions or serious dysfunction to any bodily organ or part, or (c)
death of the Member.
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1.13 HCFA - is the Health Care Financing Administration, an
administrative agency of the United States Government responsible for
administering the Medicare program.
1.14 HCFA AGREEMENT - is the Medicare-risk contract entered into by and
between PacifiCare and HCFA, under which PacifiCare is obligated to provide or
arrange for comprehensive health care services on a risk-sharing basis to each
Medicare beneficiary who is enrolled as a Member of the Secure Horizons Health
Plan.
1.15 HHS - is the United States Department of Health and Human Services.
1.16 HOSPITAL SERVICES - are the Medically Necessary inpatient and
outpatient health care services which Participating Hospitals shall provide to
Members and which Medical Group shall arrange, coordinate and authorize for
Members pursuant to the PacifiCare Health Plan in which the Member is enrolled.
Hospital Services under each PacifiCare Health Plan are summarized in Section I
of Exhibits A1 through A3.
1.17 MEDICAID - is a federal and state funded health care program
established by Title XIX of the Social Security Act, as amended, which is
administered in Oregon by OMAP.
1.18 MEDICAID AGREEMENT - is the Provider Services Agreement entered into
by and between PacifiCare and OMAP, under which PacifiCare is obligated to
provide or arrange for comprehensive health care services on a risk-sharing
basis to OMAP Members.
1.19 MEDICAL GROUP - is the Medical Group or independent practice
association identified in the first paragraph of this Agreement and its Medical
Group Physicians.
1.20 MEDICAL GROUP MEMBER - is a Member who has selected or been assigned
to Medical Group or a Medical Group Physician as such Member's Primary Care
Physician.
1.21 MEDICAL GROUP PHYSICIAN - is a person licensed to practice medicine
or osteopathy in the State who either is employed by Medical Group, is partner
or shareholder of Medical Group or has entered into a written contract with
Medical Group to provide Medical Services to Members pursuant to this Agreement.
1.22 MEDICAL GROUP SERVICE AREA - is the geographical area within a
twenty (20) mile radius of Medical Group, as described in Exhibit L.
1.23 MEDICAL GROUP SUBCONTRACTS - are the written contracts entered into
between Medical Group and Medical Group Physicians who are independent
contractors for the performance of Medical Services.
1.24 MEDICAL SERVICES - are the Medically Necessary health care services
which Medical Group shall provide to Members pursuant to the PacifiCare Health
Plan in which the Member is enrolled. Medical Services under each PacifiCare
Health Plan are summarized in Section II of Exhibits A1 through A3. Medical
Services must be prescribed, directed or authorized by Medical Group, unless
such services are Emergency Services. For Secure Horizons only these also
include Urgently Needed Services.
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1.25 MEDICALLY NECESSARY SERVICES - are Covered Services which are
determined by PacifiCare or a Medical Group Physician, in accordance with
accepted standards of medical and surgical practice in the Medical Group Service
Area and the general medical community and the professional standards
recommended by PacifiCare's Quality Improvement Committee, to be required for
the diagnosis and/or treatment of a Member's injury, illness or medical
condition.
1.26 MEDICARE - is the Hospital Insurance Plan (Part A) and the
supplementary Medical Insurance Plan (Part B) provided under Title XVIII of the
Social Security Act, as amended (codified in Title 42 of the United States Code)
and the regulations promulgated thereunder by the Secretary of HHS and HCFA
(codified in Title 42 of the Code of Federal Regulations).
1.27 MEMBER - is an individual who is enrolled in a PacifiCare Health
Plan, who meets all the eligibility requirements for membership in such plan and
for whom all applicable health plan premiums are received by PacifiCare. For the
purpose of this Agreement, Member shall include all eligible family members of
the Subscriber.
1.28 MONTHLY HCFA PAYMENT - is the revenue received by PacifiCare each
month from HCFA, as determined by HCFA, for the Covered Services to be provided
to each Member of the Secure Horizons Health Plan.
1.29 MONTHLY OMAP PAYMENT - is the revenue received by PacifiCare each
month from OMAP, as determined by OMAP, for the Covered Services to be provided
to each Member of the PacifiCare Medicaid Plan.
1.30 NCOA - is the National Committee for Quality Assurance, a managed
care accreditation organization.
1.31 NON-CAPITATED SERVICES - are the Covered Services for which
PacifiCare has assumed full financial responsibility under this Agreement, as
identified in the Benefits Matrix applicable to each PacifiCare Health Plan as
set forth in Exhibits B1 through B3.
1.32 NON-PARTICIPATING PROVIDERS - are licensed physicians, physician
groups, surgeons, osteopaths, paramedical personnel, hospitals and other
licensed health care professionals and health care facilities who provide
services to Members covered under a PacifiCare Health Plan, but who or which do
not have written agreements with PacifiCare or Medical Group to provide such
services.
1.33 OMAP - is the Oregon Department of Human Resources, Office of
Medical Assistance Program, the State administrative agency responsible for
administering the Medicaid program in the State of Oregon.
1.34 OMAP MEMBER - is an individual who is eligible for Medicaid
benefits, as approved by OMAP, and who is enrolled in the PacifiCare Medicaid
Plan pursuant to the Medicaid Agreement. Unless otherwise specified, references
in this Agreement to Member shall include OMAP Members.
1.35 PACIFICARE COMMERCIAL PLANS - are the prepaid health care service
plans sold by PacifiCare to individuals (excluding individuals eligible for the
PacifiCare Medicaid Plan or Secure Horizons) and to employer groups,
associations with employer group participation, unions and other organizations
covering the provision of Covered Services to their employees and dependents,
which services are summarized in Exhibit A1. References to the PacifiCare
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Commercial Plan include the PacifiCare Point-of-Service Plan. Unless otherwise
specified, references in the Agreement to the PacifiCare Health Plan shall
include the PacifiCare Commercial Plans.
1.36 PACIFICARE MEDICAID PLAN - is the prepaid health care service plan
operated by PacifiCare covering the provision of Covered Services to OMAP
Members, which services are summarized in Exhibit A3. Unless otherwise
specified, references in the Agreement to the PacifiCare Health Plan shall
include the PacifiCare Medicaid Plan.
1.37 PACIFICARE HEALTH PLAN - is any one of the various prepaid health
care service plans operated by PacifiCare, including but not limited to, the
PacifiCare Commercial Plans, the PacifiCare Medicaid Plan and Secure Horizons.
1.38 PACIFICARE POINT-OF-SERVICE PLAN - is a PacifiCare Commercial Plan
(also called the Option Plan) approved by the Oregon Department of Consumer and
Business ("D.C.B.S."). Option Members receive financial incentives to obtain In-
Network Services in the form of reduced Copayments and deductibles. Unless
otherwise specified, references in the Agreement to the PacifiCare Commercial
Health Plan shall include the PacifiCare Point-of-Service Plan.
1.39 PACIFICARE SERVICE AREA - is the geographic area in which, as of the
Effective Date of this Agreement, PacifiCare is licensed, authorized or approved
to provide or arrange for Covered Services by (a) the D.C.B.S. for the
PacifiCare Commercial Plans, (b) HCFA for the Secure Horizons Health Plan, and
(c) OMAP for the PacifiCare Medicaid Plan.
1.40 PARTICIPATING FACILITY - is any licensed general acute care
hospital, skilled nursing facility, extended care facility, home health agency,
alcoholism and drug abuse center or any other health care facility which has
entered into a written agreement to provide Covered Services to Members pursuant
to the PacifiCare Health Plan.
1.41 PARTICIPATING MEDICAL GROUP - includes Medical Group and is any
group or association duly organized and qualified by and under the laws of the
State as a professional medical corporation or partnership which employs or
contracts with licensed doctors of medicine or osteopathy, and which has entered
into a written agreement with PacifiCare to provide or arrange Covered Services
to Members who have selected or been assigned to that Participating Medical
Group as their primary provider of care.
1.42 PARTICIPATING PHYSICIAN - is any person licensed to practice
medicine or osteopathy by the State Medical Board or the Board of Osteopathic
Examiners to provide Medical Services within the scope of his or her practice,
and who has entered into a written agreement with PacifiCare or a Participating
Medical Group for the provision of Medical Services to Members.
1.43 PARTICIPATING PROVIDER - is a Participating Physician, Participating
Medical Group, Participating Facility or any other licensed health practitioner
or facility, such as a mental health professional or Ancillary Services
provider, who or which has entered into a written agreement for the provision of
Covered Services to Members.
1.44 PREVAILING RATES - are the usual, reasonable and customary rates for
a particular health service in the Service Area. Usual, reasonable and customary
rates are the amounts that a provider currently uniformly charges patients for
specific services, provided such charges are reasonable in
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relation to the charges of similar providers in the Service Area for the same
services and accommodations.
1.45 PRIMARY CARE PHYSICIAN - is a Participating Physician who is an
internist, general practitioner, family practitioner, pediatrician or women's
health care provider who has agreed to accept the responsibility for providing
primary care services within the scope of his or her license to Members who have
selected or been assigned to that Primary Care Physician, for maintaining the
continuity of patient care, and for initiating and coordinating Referrals for
hospital admissions, outpatient surgeries and specialist care.
1.46 QUALITY IMPROVEMENT COMMITTEES - are committees separately
established and operated by PacifiCare and Medical Group to oversee and ensure
the quality of Covered Services provided to Members as required by PacifiCare,
the D.C.B.S., HCFA, OMAP or any other governmental agency with regulatory or
enforcement jurisdiction over PacifiCare, Medical Group or this Agreement.
1.47 REFERRAL - is a written document approved by a Primary Care
Physician directing a Member to another Participating Provider for the purpose
of obtaining Covered Services that cannot be directly provided by the Primary
Care Physician.
1.48 REFERRAL PROVIDER - is a provider of Medical Services, Hospital
Services or Ancillary Services, other than a Medical Group Physician, with whom
Medical Group has entered into a written agreement to provide Covered Services
to Members upon Referral from a Primary Care Physician.
1.49 SECURE HORIZONS HEALTH PLAN - is the PacifiCare Health Plan covering
the provision of Covered Services to Medicare beneficiaries, which services are
described in Exhibit A2. Unless otherwise specified, references in this
Agreement to the PacifiCare Health Plan shall include the Secure Horizons Health
Plan.
1.50 SECURE HORIZONS MEMBER - is an individual who is eligible for
Medicare benefits, as approved by HCFA, and who is enrolled as a Member in the
Secure Horizons Health Plan pursuant to the HCFA Agreement. Unless otherwise
specified, references in the Agreement to Members shall include Secure Horizons
Members.
1.51 SPECIALIST PHYSICIAN - is a Participating Physician, other than a
Medical Group Physician, who is board-certified or board-eligible in a specialty
of medical care defined and recognized by the American Medical Association, who
is responsible for providing Covered Services to Members upon Referral from a
Primary Care Physician and the prior authorization of Participating Medical
Group.
1.52 SUBSCRIBER AGREEMENT - is the written agreement entered into between
PacifiCare and a Subscriber or Subscriber Group for the provision of Covered
Services to eligible Members enrolled in one of the PacifiCare Health Plans.
1.53 SUBSCRIBER OR SUBSCRIBER GROUP - is an individual (except for
Medicare or Medicaid beneficiary) or the employer, employer group, organization
or company which has entered into a Subscriber Agreement with PacifiCare.
1.54 SUPPLEMENTAL BENEFITS - are Non-Capitated Services under a
Subscriber Agreement, such as prescription services and vision benefits, which
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are offered by PacifiCare in addition to the basic benefits under the applicable
PacifiCare Health Plan and which may require an additional premium from the
Subscriber Group as consideration for the additional benefits.
1.55 URGENTLY NEEDED SERVICES - are Medically Necessary Covered Services
that are required without delay in order to prevent serious deterioration of a
Member's health as the result of an unforeseen illness or injury while the
Member is temporarily absent from the Service Area.
1.56 UTILIZATION MANAGEMENT COMMITTEE - is the committee established by
Medical Group to develop and implement procedures for the efficient use of
resources, consistent with state and federal law and NCQA standards, for the
provision of Covered Services. The Utilization Management Committee shall
perform prospective, current and retrospective review and management of Covered
Services. The Utilization Management Committee shall consist of at least three
(3) Medical Group Physicians.
2. RELATIONSHIP OF PARTIES
2.1 LIABILITY FOR OBLIGATIONS - Notwithstanding any other provision of
this Agreement, nothing contained herein shall cause either PacifiCare or
Medical Group to be liable or responsible for any debt, liability or obligation
of the other party or any third party, unless such liability or responsibility
is expressly assumed by the party sought to be charged therewith. Each party
shall be solely responsible for, and shall indemnify and hold the other party
harmless against, any obligation for the payment of wages, salaries or other
compensation (including all state, federal and local taxes and mandatory
employee benefits), insurance and voluntary employment-related or other
contractual or fringe benefits as may be due or payable by the party to or on
behalf of such party's employees, agents and representatives.
2.2 INDEPENDENT CONTRACTOR
2.2.1 RELATIONSHIP BETWEEN PACIFICARE AND MEDICAL GROUP - The
relationship between PacifiCare and Medical Group is an independent contractor
relationship. Neither Medical Group nor its Medical Group Physicians, partners,
employees and agents are the employees or agents of PacifiCare and neither
PacifiCare nor any employee or agent of PacifiCare is a member, partner,
employee or agent of Medical Group. Medical Group is responsible for Medical
Services and Hospital Services arranged by the Medical Group and provided to
Members. None of the provisions of this Agreement shall be construed to create a
relationship of agency, representation, joint venture, ownership, control or
employment between the parties other than that of independent parties
contracting for the purpose of effectuating this Agreement.
2.2.2 RELATIONSHIP BETWEEN PACIFICARE OR MEDICAL GROUP AND THE STATE
OF OREGON AND OMAP - The relationship between PacifiCare or Medical Group, as a
subcontractor of PacifiCare as a result of this Agreement and participation in
the PacifiCare Medicaid Plan, and the State of Oregon and OMAP are independent
contractor relationships. Neither PacifiCare nor Medical Group nor any of their
agents, officers or employees are agents, officers or employees of the State of
Oregon or OMAP. None of the provisions of this Agreement shall be construed to
create a relationship of partnership, joint venture or employment between
PacifiCare or Medical Group, as a subcontractor of PacifiCare, and the State of
Oregon or OMAP.
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2.3 MEDICAL GROUP INDEMNIFICATION OF OMAP AND THE STATE OF OREGON -
Neither the State of Oregon, OMAP nor their employees or agents nor the OMAP
Members shall be responsible or liable for any acts or omissions of Medical
Group. Medical Group shall defend, indemnify and hold harmless the State of
Oregon and OMAP and its officers, agents and employees, from and against all
actions, suits or claims of any nature whatsoever resulting from or arising out
of the activities or omissions of Medical Group and its Medical Group
Physicians, agents and employees under this Agreement; provided, however,
Medical Group shall not be required to defend or indemnify the State of Oregon
or OMAP or their officers, agents or employees from or against any act or
omission based solely on the alleged negligence of the State of Oregon or OMAP.
2.4 PHYSICIAN-PATIENT RELATIONSHIP - PacifiCare and Medical Group
acknowledge and agree that each Medical Group Physician shall be responsible for
maintaining the professional physician-patient relationship with each Member.
Medical Group Physicians shall have the sole responsibility for the medical care
and treatment of Members under Medical Group Physician's care. Nothing contained
in this Agreement is intended to interfere with the professional relationship
between any Member and Medical Group Physician.
3. DUTIES OF MEDICAL GROUP
3.1 ARRANGE OR PROVIDE COVERED SERVICES. Medical Group shall provide or
arrange all Medically Necessary Covered Services in the Medical Group Service
Area to Members identified on Medical Group's Eligibility List, in coordination
with PacifiCare and other Participating Providers and under all the terms and
conditions set forth in this Agreement and the applicable PacifiCare Health
Plans. Covered Services under the applicable PacifiCare Health Plans are
summarized in Exhibits A1 through A3, attached hereto. Medical Group shall be
financially responsible for: (a) all Capitated Services listed as Medical
Group's responsibility in the Benefits Matrix for the PacifiCare Commercial
Plans, attached hereto as Exhibit B1; (b) all Capitated Services listed as
Medical Group's responsibility in the Benefits Matrix for the Secure Horizons
Health Plan, attached hereto as Exhibit B2; and (c) all Capitated Services
listed as Medical Group's responsibility in the Benefits Matrix for the
PacifiCare Medicaid Plan, attached hereto as Exhibit B3.
3.1.1 CLARIFICATION OF BENEFITS - Medical Group may request that any
disputed clarification or explanation issued by PacifiCare concerning what are
Covered Services, Capitated Services, or Non-Capitated Services be submitted for
review to PacifiCare, except that questions pertaining to the Medical Necessity
of a Covered Service shall be submitted to the PacifiCare Quality Improvement
Committee.
3.1.2 INFORMATION TO MEMBERS - Upon request by PacifiCare, Medical
Group shall assist PacifiCare in educating Members regarding the Covered
Services available under the specific PacifiCare Health Plan in which the Member
is enrolled.
3.2 MEDICAL GROUP PHYSICIANS
3.2.1 RESPONSIBILITIES - Medical Group shall arrange for Covered
Services to be provided to Members by the Medical Group Physicians. Each Medical
Group Physician who is a Primary Care Physician shall be responsible for
providing all Medically Necessary Medical Services, overseeing the continuity of
care, and directing, authorizing and coordinating Referrals for the provision of
Hospital Services and other Ancillary Services for each
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Medical Group Member who has selected or been assigned to that Primary Care
Physician. Medical Group shall also include appropriate Specialist Physicians
and other Referral Providers who shall be responsible for providing Covered
Services to Members upon Referral from Primary Care Physicians.
3.2.2 ACCESSIBILITY AND AVAILABILITY - Medical Group shall require
and demonstrate the continuous availability and accessibility of adequate
numbers of Medical Group Physicians to provide or arrange for Covered Services
to Medical Group Members on a twenty-four (24) hour basis, seven (7) days a
week, including the provision or arrangement of Emergency Services. Medical
Group shall comply with the access standards established by PacifiCare in
accordance with applicable federal and state law and regulations and NCQA
standards, as set forth in the Provider Manual and in Exhibit N of this
Agreement.
3.2.3 MEDICAL GROUP PHYSICIAN INFORMATION - Medical Group shall
provide to PacifiCare at the time of the execution of this Agreement: (a) a
complete list of the names, addresses, State license numbers, specialties,
normal hours of operation (including any provisions for Emergency Services on a
twenty-four (24) hour basis), maximum capacity and maximum waiting periods of
each Medical Group Physician; (b) a list of the Specialist Physicians, hospitals
and other Referral Providers regularly utilized by Medical Group as part of its
Referral system; and (c) any additional provider information required by the
D.C.B.S., HCFA or OMAP. Medical Group shall update this information as received
from Medical Group Physicians or at PacifiCare's request.
3.2.4 CAPACITY LIMITATION NOTICE - Medical Group shall provide at
least thirty (30) days prior written notice to PacifiCare of any significant
changes in the capacity of Medical Group or any Medical Group Physician who is a
Primary Care Physician. A significant change is the inability to accept
assignment of additional Members. After the giving of such notice and the
expiration of the notice period, no Medical Group Physician who is the subject
of such notice shall be required to accept coverage for any additional Members
until such time as Medical Group provides written notice that the applicable
provider is available to accept coverage of additional Members. Primary Care
Physicians who are identified on a limitation of capacity notice shall still be
responsible to provide Covered Services to Medical Group Members whom the
Primary Care Physician had agreed to accept before expiration of the thirty (30)
day capacity notice period. If any Medical Group Physician is unable to provide
Covered Services to additional Members, Medical Group shall still be responsible
for arranging Covered Services to all Medical Group Members through its
remaining Medical Group Physicians.
3.3 STANDARDS
3.3.1 LICENSURE AND CREDENTIALING REQUIREMENTS - Medical Group
represents and warrants to PacifiCare that each Medical Group Physician is
currently and shall remain for the duration of this Agreement: (a) the holder of
a currently valid, unrestricted license to practice medicine or osteopathy in
the State; (b) a member in good standing of the medical staff of, and maintains
appropriate privileges at, a Participating Facility where Covered Services shall
be provided to Members; and (c) meets all of the other credentialing standards
established by PacifiCare as set forth in this Agreement and the Provider
Manual. In addition, Medical Group represents and warrants that all nurses and
other ancillary and paramedical personnel who are employed by or contract with
Medical Group to provide or assist Medical Group
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in providing Covered Services to Members are properly licensed, certified or
otherwise authorized and credentialed to practice in the State.
3.3.2 PROFESSIONAL AND QUALITY OF CARE STANDARDS - All Covered
Services shall be provided by Medical Group Physicians in accordance with
accepted medical, hospital and surgical practices and professional standards
prevailing in the Service Area and the general medical community, and in
conformity with the quality of care standards established by the PacifiCare
Quality Improvement Committee in accordance with applicable federal and state
law and NCQA standards. Medical Group shall ensure that all Medical Group
Physicians comply with such professional and quality of care standards.
3.3.3 MEDICARE AND MEDICAID PARTICIPATION STANDARDS - Medical Group
shall require that all Medical Group Physicians satisfy the standards for
participation and all applicable requirements for providers of health care
services under the Medicare program and Medicaid program. In addition, Medical
Group shall require that all facilities and offices utilized by Medical Group
and Medical Group Physicians to provide Covered Services to Members shall comply
with the facility standards established by HCFA and OMAP pursuant to the
Medicare and Medicaid programs, respectively, and Medical Group and Medical
Group Physicians shall cooperate with any inspections of Medical Group
facilities, as conducted by HCFA, OMAP or PacifiCare staff, that are required to
assure compliance with HCFA or OMAP facility standards.
3.4 INSURANCE - Medical Group shall maintain professional liability
insurance and general liability and errors and omissions liability insurance in
the minimum amounts of one million dollars ($1,000,000) per occurrence and three
million dollars ($3,000,000) per physician annual aggregate for coverage of
Medical Group and its agents, employees and Medical Group Physicians. Such
professional liability insurance shall provide coverage of direct and vicarious
liability relating to any damages caused by an error, omission or any negligent
acts. In addition, Medical Group shall obtain and maintain workers' compensation
coverage for all of its employees in accordance with the State Worker's
Compensation Law. Medical Group shall require each Medical Group Physician who
is an independent contractor to maintain professional liability insurance and
general liability insurance coverage in the minimum amounts of one million
dollars ($1,000,000) per occurrence and three million dollars ($3,000,000)
annual aggregate for coverage of Medical Group Physician and his or her agents
and employees. In the event Medical Group or a Medical Group Physician procures
a "claims made" policy as distinguished from an occurrence policy, Medical Group
or Medical Group Physician shall procure and maintain prior to termination of
such insurance "extended reporting coverage" for the maximum term provided in
their professional liability policy. Medical Group shall notify PacifiCare
immediately upon becoming aware of any material changes in any of the above
insurance coverages and shall provide (or required the applicable Medical Group
Physician to provide) a certificate of such insurance coverage to PacifiCare
upon request.
3.5 NON-BILLING OF MEMBERS - Medical Group agrees to accept payment as
provided in Section 5.1 of this Agreement as payment in full for the Covered
Services required under this Agreement. With the exception of Copayments and
charges for non-Covered Services delivered on a fee-for-service basis to
Members, Medical Group agrees that in no event, including but not limited to,
nonpayment by PacifiCare, insolvency of PacifiCare or breach of this Agreement,
shall Medical Group bill, charge, collect or receive compensation, reimbursement
or payment nor attempt to charge, collect or receive payment from any Member or
persons other than PacifiCare acting on Member's behalf for Covered Services
provided pursuant to this Agreement. Percentage Member
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copayments shall be charged as a percentage of the rate agreed upon in Section
3.15, Reciprocity. Medical Group shall not maintain any action at law or
equity against any Member or any person acting on Member's behalf to collect any
sums owed by PacifiCare to Medical Group. Upon notice of any violation of this
Section 3.5, PacifiCare may terminate this Agreement pursuant to Section 7.2 and
take all other appropriate action consistent with applicable state and federal
law and the terms of this Agreement to eliminate such charges, including but not
limited to, requiring Medical Group to return all sums improperly collected from
Members or their representatives.
Medical Group agrees that the obligations created by this Section 3.5
survive the termination of this Agreement with respect to Covered Services
provided during the term of this Agreement without regard to the cause of such
termination and shall be construed to be for the benefit of Members, and that
this provision supersedes any oral or written contrary agreement now existing or
hereafter entered into between Medical Group and Member or persons acting on
Member's behalf.
Nothing contained in this Section 3.5 shall prohibit Medical Group from
billing and collecting payment from Members for non-Covered Services provided to
Members and for services rendered due to the fraud or misrepresentation of
Members, at Medical Group's Prevailing Rates. Medical Group shall not bill
Members for services authorized in writing by Medical Group as Covered Services.
In addition, Medical Group shall include in each Medical Group Subcontract
a provision that in the event that Medical Group fails to pay the applicable
Medical Group Physician for Covered Services provided to Members, the Member
shall not be liable to the Medical Group Physician for any sums owed by Medical
Group to the Medical Group Physician.
3.6 CONTINUING CARE OBLIGATION FOLLOWING TERMINATION - Upon termination
of this Agreement, Medical Group shall continue to provide or arrange for
Covered Services to Members under the care of a Medical Group Physician at the
time of termination until the effective date of transfer of such Members to, or
the assumption of such services by, another Participating Provider and written
notice of such transfer or assumption has been provided by PacifiCare to Medical
Group (the "Continuing Care Period"). PacifiCare shall use its best efforts to
provide for the transfer of Members or the assumption of such services as soon
as is reasonably practicable, taking into account the best interests of the
Member and the availability of appropriate alternative Participating Providers.
PacifiCare shall compensate Medical Group for Covered Services provided to
Members during the Continuing Care Period at eighty-five percent (85%) of
Prevailing Rates.
Notwithstanding the above or any other provision of this Agreement to the
contrary, Medical Group agrees that in the event PacifiCare ceases operations
for any reason, including but not limited to insolvency, Medical Group shall
provide Covered Services and shall not bill, charge, collect or receive any form
of payment from any Member or have any recourse against a Member for Covered
Services provided after PacifiCare ceases operations. This obligation to
continue providing Covered Services following termination of the Agreement shall
be for the period for which premiums have been paid or the Monthly HCFA Payment
and Monthly OMAP Payment have been received, but shall not exceed a period of
thirty (30) days, except for those Members who are hospitalized on an inpatient
basis as provided below.
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In the event PacifiCare ceases operations or Medical Group terminates this
Agreement on the basis of PacifiCare's failure to make timely Capitation
Payments, Medical Group shall continue to arrange for Covered Services to those
Members who are hospitalized on an inpatient basis at the time PacifiCare ceases
operations or Medical Group terminates this Agreement until such Members are
discharged from the hospital.
Medical Group agrees that the obligations set forth in this Section 3.6
shall survive the termination of this Agreement without regard to the cause of
termination of the Agreement, and shall be construed to be for the benefit of
the Members, and shall be subject to revision as necessary to comply with
regulatory requirements. Medical Group agrees to include the obligations set
forth in this Section 3.6 in each Medical Group Subcontract.
3.7 PROVIDER POLICIES AND PROCEDURES MANUAL - Medical Group shall abide
by the standards, policies and procedures established by PacifiCare for the
administration and operation of the PacifiCare Health Plan in compliance with
applicable state and federal law and NCQA standards. PacifiCare's standards,
policies and procedures are set forth in the PacifiCare Provider Policies and
Procedures Manual (the "Provider Manual"). The Delegated Sections is hereby
incorporated in full into this Agreement by this reference. A copy of the
Provider Manual shall be provided to Medical Group upon execution of this
Agreement. Medical Group shall be responsible for distributing copies of the
Provider Manual to each Medical Group Physician.
3.8 CREDENTIALING, RECREDENTIALING AND PEER REVIEW
3.8.1 PARTICIPATE IN CREDENTIALING, RECREDENTIALING AND PEER
REVIEW - Medical Group shall participate in and cooperate with PacifiCare in the
credentialing, recredentialing and ongoing peer review of Medical Group
Physicians in accordance with the standards, policies and procedures established
by PacifiCare from time to time as set forth herein and in the Provider Manual.
Medical Group shall cooperate with PacifiCare to maintain compliance with NCQA
standards and applicable state and federal laws.
3.8.2 DELEGATION TO MEDICAL GROUP - PacifiCare shall delegate to
Medical Group and Medical Group shall perform those credentialing,
recredentialing and peer review activities specified in Exhibit I. PacifiCare
shall have the right at any time to revoke the delegation of any or all of the
credentialing, recredentialing and peer review activities specified in Exhibit
I.
3.8.3 COOPERATE WITH OVERSIGHT AND MONITORING - Medical Group shall
cooperate with PacifiCare in PacifiCare's ongoing monitoring, oversight and
assessment of Medical Group's performance of any delegated credentialing,
recredentialing and peer review activities through monthly, quarterly and/or
annual reports, meetings and on-site audits and assessments of Medical Group.
Without limiting the foregoing, Medical Group shall maintain credentialing,
recredentialing and peer review information and files in a form acceptable to
PacifiCare, permit PacifiCare to review and copy credentialing and
recredentialing and to provide access to peer review files, cooperate with
PacifiCare in all on-site visits and make records available to PacifiCare upon
request and as required by NCQA and applicable state and federal laws. Medical
Group shall provide to PacifiCare copies of all completed credentialing and
recredentialing applications for each Medical Group Physician and copies of such
other credentialing and recredentialing information which PacifiCare may request
for its monitoring and oversight of delegated activities.
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3.8.4 APPROVAL AND TERMINATION OF MEDICAL GROUP PHYSICIANS - Medical
Group acknowledges and agrees that (i) only Medical Group Physicians who meet
PacifiCare's credentialing standards shall be approved by PacifiCare to provide
Medical Services to Members, and (ii) PacifiCare retains the right, in its sole
discretion, to approve or deny any Medical Group Physician to provide Medical
Services to Members and to reduce, suspend or terminate any Medical Group
Physician from providing Medical Services to Members at any time, with due
process.
(a) NOTICE OF NEW MEDICAL GROUP PHYSICIANS - Medical Group shall
provide PacifiCare with written notice of each new Medical Group Physician
thirty (30) days prior to the Medical Group Physician providing Medical Services
to Members. New Medical Group Physicians shall be deemed approved by PacifiCare
unless PacifiCare provides Medical Group with written notice of objection to the
participation of such new Medical Group Physician prior to expiration of the
thirty (30) day notice period. Any new Medical Group Physician must be
credentialed in accordance with this Section 3.8 prior to providing Covered
Services to Members.
(b) TERMINATION OF MEDICAL GROUP PHYSICIANS. Medical Group shall
take appropriate action to limit, suspend or terminate any Medical Group
Physician from providing Medical Services to Members under this Agreement and
the applicable Medical Group Subcontract under the following circumstances: (i)
the Medical Group Physician ceases to meet the licensure requirement,
credentialing or other standards set forth in this Agreement and the Provider
Manual; (ii) upon Medical Group's or PacifiCare's reasonable determination that
there are serious deficiencies in the quality of care or professional competence
or conduct of the Medical Group Physician which affects or could adversely
affect health, safety or well-being of Members; or (iii) upon the Medical Group
Physician's material breach of a Medical Group Subcontract or inability to
perform under such Subcontract. Medical Group shall immediately and concurrently
provide PacifiCare with written notice of Medical Group's actions hereunder.
Upon termination of any Medical Group Subcontract with a Primary Care Physician,
Medical Group shall notify Members who have selected or been assigned to such
Primary Care Physician of the termination, and shall arrange Covered Services
for such Members through alternative Medical Group Physicians or other
Participating Providers following the termination.
(c) IMMEDIATE TERMINATION OF MEDICAL GROUP PHYSICIAN AT
PACIFICARE'S REQUEST - Medical Group shall immediately terminate any Medical
Group Physician's participation in the delivery of Covered Services to Members
under this Agreement and the applicable Medical Group Subcontract upon receipt
of written notice from PacifiCare demanding such termination. If Medical Group
fails to take the action required by this subsection (d), PacifiCare reserves
the right to take immediate action to prohibit such Medical Group Physician from
continuing to provide Medical Services to Members under this Agreement.
3.8.5 APPROVAL OF MEDICAL GROUP FACILITIES - Medical Group
acknowledges and agrees that: (i) the PacifiCare standards, policies and
procedures for credentialing and recredentialing include standards for review
and approval of the facilities utilized by Medical Group and Medical Group
Physicians to provide Covered Services to Members; and (ii) PacifiCare retains
the responsibility for credentialing and recredentialing of Medical Group
Facilities and the right, in its sole discretion, to approve or deny any Medical
Group facility.
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3.9 QUALITY MANAGEMENT AND IMPROVEMENT PROGRAM
3.9.1 PARTICIPATE IN QUALITY IMPROVEMENT PROGRAM - Medical Group
shall participate in and cooperate with PacifiCare in the operation of the
Quality Management and Improvement Program established by PacifiCare to monitor
the quality of Covered Services provided to Members by Medical Group and other
Participating Providers, as amended or modified from time to time (the "QI
Program"). The QI Program is set forth in the Provider Manual and is hereby
incorporated into this Agreement by this reference. The QI Program shall be
administered in accordance with any and all requirements established by the
D.C.B.S., HCFA and OMAP and the NCQA standards. Medical Group shall cooperate
with PacifiCare to maintain compliance with NCQA standards and applicable state
and federal laws. Medical Group shall cooperate with and abide by all decisions
of the PacifiCare Quality Improvement Committee relating to the quality of care
provided by Medical Group and Medical Group Physicians.
3.9.2 QUALITY IMPROVEMENT COMMITTEE - Medical Group shall maintain a
Quality Improvement Committee that shall perform quality assurance reviews as
required by the PacifiCare Quality Improvement Committee, the D.C.B.S., HCFA,
OMAP or any other governmental agency with regulatory or enforcement
jurisdiction over this Agreement. Medical Group's Quality Improvement Committee
shall meet as frequently as necessary but at least monthly and shall keep
minutes of the committee meetings, copies of which shall be made available for
review by PacifiCare's Quality Improvement Committee from time to time upon
request. The confidentiality of all such minutes shall be protected to the
fullest extent consistent with applicable law. Medical Group agrees that, when
appropriate and upon reasonable notice, PacifiCare's Medical Director or a
member of the PacifiCare medical services staff may participate in Medical Group
Quality Improvement Committee meetings during the discussion of matters relating
to care provided to PacifiCare Members. In addition, Medical Group shall, at the
written request of PacifiCare, make available one Medical Group Physician to
attend and participate in PacifiCare Quality Improvement Committee meetings
related to care provided to Medical Group Members.
3.9.3 DELEGATION TO MEDICAL GROUP - PacifiCare shall delegate to
Medical Group and Medical Group shall perform those quality management and
improvement activities specified in Exhibit J. PacifiCare shall have the right
at any time to revoke the delegation of any or all of the quality management and
improvement activities specified in Exhibit J. In such event, Medical Group
shall continue to be bound by the other provisions of this Section 3.9 regarding
quality management and improvement and shall assist and cooperate with
PacifiCare in quality management and improvement activities.
3.9.4 COOPERATE WITH OVERSIGHT AND MONITORING ACTIVITIES - Medical
Group shall cooperate with PacifiCare in PacifiCare's ongoing monitoring,
oversight and assessment of Medical Group's performance of delegated quality
management and improvement activities through monthly, quarterly and/or annual
reports. Medical Group shall maintain quality improvement and management
information in a form acceptable to PacifiCare, permit PacifiCare to review and
copy quality management and improvement files, cooperate with PacifiCare in any
and all on-site visits and make records available to PacifiCare upon request and
as required by NCQA and applicable state and federal law.
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3.10 UTILIZATION MANAGEMENT PROGRAM
3.10.1 PARTICIPATE IN UTILIZATION MANAGEMENT PROGRAM - Medical
Group agrees to participate and cooperate with PacifiCare in the operation of
the utilization management and review and case management program established by
PacifiCare for the purposes of pre-authorization and concurrent and
retrospective review of the medical necessity, cost effectiveness,
appropriateness, and level of care and utilization of Covered Services provided
to Members by Medical Group, as amended or modified from time to time by
PacifiCare (the "UM Program"). The UM Program is set forth in the Provider
Manual and is hereby incorporated into this Agreement by this reference. The UM
Program shall be administered in accordance with any and all requirements
established by the D.C.B.S., HCFA and OMAP and with the NCQA utilization
management standards. Medical Group shall cooperate with PacifiCare to maintain
compliance with such NCQA standards and applicable state and federal law.
3.10.2 UTILIZATION MANAGEMENT COMMITTEE - Medical Group shall
establish and maintain a Utilization Management Committee consisting of at least
three (3) Medical Group Physicians. The Utilization Management committee shall
meet as frequently as necessary but at least bi-weekly and shall keep minutes of
the committee meetings, copies of which shall be made available for review by
PacifiCare from time to time upon request. The confidentiality of all such
minutes shall be protected to the fullest extent consistent with applicable law.
Medical Group agrees that, when appropriate and upon reasonable notice,
PacifiCare's Medical Director or a member of the PacifiCare medical services
staff may participate in Medical Group Utilization Management Committee meetings
during the discussion of matters relating to medical care provided to PacifiCare
Members.
3.10.3 DELEGATION OF ACTIVITIES TO MEDICAL GROUP - PacifiCare
shall delegate to Medical Group, and Medical Group agrees to perform, those
utilization management and review activities specified in Exhibit K. PacifiCare
shall have the right to revoke the delegation of any or all of the utilization
management activities specified in Exhibit K in the event of Medical Group's
material failure to comply with the terms of Section 3.10 and the subsections
thereto. In such event, Medical Group shall continue to be bound by the other
provisions of this Section 3.10 regarding utilization management and shall
assist and cooperate with PacifiCare in utilization management activities.
3.10.4 COOPERATE WITH OVERSIGHT AND MONITORING ACTIVITIES -
Medical Group shall cooperate with PacifiCare in PacifiCare's ongoing
monitoring, oversight and assessment of Medical Group's performance of delegated
utilization management and review activities through monthly, quarterly and/or
annual reports, meetings and on-site audits and assessments of Medical Group.
Medical Group shall maintain utilization management information in a form
acceptable to PacifiCare, permit PacifiCare to review and copy utilization
management files, cooperate with PacifiCare in any and all on-site visits and
make records available to PacifiCare upon request and as required by NCQA and
applicable state and federal law.
3.10.5 MEDICAL CARE CRITERIA - Medical Group shall consider the
criteria for medical care that are established or approved by PacifiCare's
Quality Improvement Committee and/or Medical Director as a reference in
determining appropriate lengths of stay for hospitalized Members or appropriate
utilization patterns for Referrals.
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3.10.6 HOSPITAL ADMISSIONS - Whenever a Medical Group Physician
determines that a Member requires Hospital Services that are not Emergency
Services, the Medical Group Physician shall arrange for such Hospital Services
through the Medical Group's Utilization Management Committee and its utilization
review program. Medical Group Physicians shall not serve as admitting physicians
for any Members without such prior approval, except in the event Emergency
Services are required. If a Medical Group Physician admits a Member to a
Hospital for Emergency Services, Medical Group shall notify PacifiCare of such
admission within twenty-four (24) hours or as soon as possible, but in no event
later than the next business day after treatment or admission. Admissions for
Emergency Services or Urgently Needed Services shall be made to Participating
Hospitals, if possible.
3.10.7 REFERRALS - Medical Group shall refer Members for Medically
Necessary specialty care only to Specialist Physicians who are Participating
Providers, and only upon the prior approval of the Utilization Management
Committee. Medical Group shall comply with all Referral procedures developed by
PacifiCare as set forth in the Provider Manual prior to Referring a Member to a
Specialist Physician or other Referral Provider.
3.11 CONFORMANCE REQUESTS AND CORRECTIVE ACTION - Medical Group shall
investigate and, when warranted, take appropriate corrective action to address
and resolve quality of care and other problems involving Medical Group
Physicians that are brought to Medical Group's attention through its internal
procedures, by PacifiCare in writing or through audits conducted by HCFA, OMAP
or the D.C.B.S. Medical Group shall develop a written corrective action plan
whenever PacifiCare's Quality Improvement Committee issues a Conformance Request
finding that inappropriate or substandard Covered Services have been provided or
Covered Services that should have been provided have not been provided by
Medical Group or a Medical Group Physician. Upon Medical Group's request,
PacifiCare shall assist Medical Group in the formulation of such corrective
action plans and remedial procedures. Medical Group's corrective action plan
must address procedures for curing any deficiencies reasonably identified by
PacifiCare and must provide for completion of the corrective action plan within
the time frames reasonably established by PacifiCare, as set forth in the
Provider Manual or the Conformance Request. PacifiCare shall issue Conformance
Requests within its discretion and shall have no obligation to issue a
Conformance Request prior to providing notice of termination.
3.12 CATASTROPHIC CASE MANAGEMENT - Medical Group and PacifiCare
recognize the need to manage Catastrophic Cases effectively. Medical Group shall
report known Catastrophic Cases to PacifiCare immediately. Medical Group agrees
that PacifiCare's Medical Director or his or her designee may be involved in the
coordination of Catastrophic Cases. Medical Group shall allow the PacifiCare
Medical Director and PacifiCare health services personnel to perform concurrent
review of Catastrophic Cases. Detailed procedures for Catastrophic Case
management shall be mutually determined by the parties based upon Medical
Group's determination of the Member's transferability. Medical Group shall fully
assist PacifiCare upon request by providing information necessary to the
transfer of Members into regional centers for care of Catastrophic Cases.
3.13 CLAIMS PROCESSING - Medical Group shall be responsible for the
timely payment of claims for Capitated Services to Medical Group Physicians and
Referral Providers who provide Covered Services to Members pursuant to Medical
Group Subcontracts and to Non-Participating Providers who provide Covered
Services to Members. Medical Group shall pay claims under the terms
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set forth in Subsections 3.13.1 through 3.13.2 below, and as described in the
Delegated Section of the Provider Manual, incorporated herein.
3.13.1 PAYMENTS TO PROVIDERS - For purposes of this Agreement,
timely payment shall mean payment by the earlier of (i) thirty (30) days after
Medical Group's receipt of a clean claim, or (ii) such other period as is
specified by applicable state or federal law or regulation (3) the time
specified in the applicable Medical Group Subcontract. For purposes of this
Section 3.13.1 and Section 3.13.2, a clean claim is one in which Medical Group
has received the complete claim and all information necessary to determine
liability for the claim. Medical Group shall provide, at PacifiCare's request,
claims reports in a form to be mutually agreed upon by the parties.
3.13.2 MEMBER CLAIMS - Medical Group shall pay clean claims for
emergency services or other covered services for which a Member has been billed
by the earlier of (i) thirty (30) days after receipt of a claim or, (ii) such
other period as is specified by applicable state or federal law or regulation.
If the claim is contested by Medical Group, Medical Group shall notify the
Member that the claim is contested within the time period specified in this
Section 3.13.2 and shall provide PacifiCare with a copy of the notice. The
notice shall identify the portion of the claim that is contested and the
specific reasons for contesting the claim.
3.13.3 PACIFICARE ASSUMPTION OF CLAIMS PAYMENT - Upon reasonable
notice to Medical Group, Medical Group shall permit PacifiCare to conduct on-
site audits to determine Medical Group's compliance with this Section 3.13. In
the event Medical Group materially fails to timely adjudicate claims (either pay
or deny) and fails to cure such failure within thirty (30) days of the receipt
of written notice from PacifiCare, in addition to exercising any other remedies
it may have under this Agreement, PacifiCare may elect to assume Medical
Group's processing and payment obligations and charge Medical Group a reasonable
administrative fee for such services based on a negotiated rate or amount. In
such event, PacifiCare shall deduct the claims paid from Medical Group's
Capitation Payment.
3.14 NON-DISCRIMINATION - Medical Group and the Medical Group Physicians
shall not unlawfully discriminate against any Member or any employee or
applicant for employment because of race, religion, color, national origin,
ancestry, physical handicap, medical condition, marital status, age (over 40),
sex, or sexual orientation. Medical Group and the Medical Group Physicians shall
comply with Title VI of the Civil Rights Act of 1964, Section 504 of the
Rehabilitation Act of 1973 Title IX of the Education Amendments of 1972, Section
654 of the Omnibus Budget Reconciliation Act of 1981, the Americans with
Disabilities Act of 1990 and any other applicable federal or state anti-
discrimination laws and the regulations, guidelines and standards promulgated or
adopted thereunder. In addition, Medical Group and the Medical Group Physicians
shall not discriminate against any Members on the basis of income level or the
fact that the Member is a Member of a prepaid health care service plan or a
beneficiary of the Medicare or Medicaid program. Medical Group and the Medical
Group Physicians shall not refuse or fail to provide Covered Services in their
usual and customary manner to any Member, nor attempt to disenroll any Member,
because of a disability or any condition that is a direct result of the
disability or on the basis of any of the other discriminatory criteria set forth
in this Section 3.14. Medical Group shall include the requirements of this
section in each Medical Group Subcontract.
3.15 RECIPROCITY AGREEMENTS - Medical Group shall accept non-Emergency or
specialty Referrals from other Participating Providers and PacifiCare shall
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use good faith efforts to require such other Participating Providers to accept
non-Emergency or specialty Referrals from Medical Group. Payment for the
foregoing Referrals shall be no greater than eighty percent (80%) of Medical
Group's Prevailing Rates for Commercial Members or, for Secure Horizons
Members and OMAP Members, at the Medicare-allowable rates, as long as all
claims for authorized Medical Services are paid within thirty (30) days of the
date of initial billing. Medical Group shall provide Medical Services,
including Emergency Services and Urgently Needed Services, to Members enrolled
in the health benefit plans of PacifiCare affiliates or subsidiaries located in
other states at the payment rates set forth in this Section 3.15.
3.16 OTHER CONTRACTUAL COMMITMENTS - Medical Group represents and assures
PacifiCare that contractual commitments to other health care service
contractors, health maintenance organizations, competitive medical plans and
other managed care entities shall not restrict or impair Medical Group from
performing its duties under this Agreement.
3.17 DISSEMINATION OF INFORMATION - Medical Group agrees that PacifiCare
may use Medical Group's name, address and telephone number as well as the names,
addresses, telephone numbers and specialties of the Medical Group Physicians in
PacifiCare's informational materials distributed to Members, including the
PacifiCare Participating Provider Directory. Medical Group shall obtain the
prior written consent of PacifiCare prior to using PacifiCare's name in any of
Medical Group's promotional, marketing or advertising materials or for any other
reason.
3.18 MEDICAL GROUP SUBCONTRACTS - Medical Group shall enter into Medical
Group Subcontracts with all Medical Group Physicians who are independent
contractors and all Specialist Physicians and other Referral Providers regularly
utilized as part of Medical Group's Referral system. Medical Group shall utilize
written agreements which are consistent with the terms of this Agreement, in
compliance with all applicable state and federal laws and regulations and all
requirements in the HCFA Agreement and OMAP Agreement which are applicable to
subcontractors of PacifiCare, and which have been approved by PacifiCare.
Notwithstanding the existence of the Medical Group Subcontracts, Medical Group
shall remain responsible for satisfying the obligations set forth in this
Agreement.
Medical Group shall provide PacifiCare with a copy of each standard form
Medical Group Subcontract used in arranging services for Members. Within thirty
(30) days of execution of a new Medical Group Subcontract or amendment to an
existing subcontract, Medical Group shall provide to PacifiCare a copy of the
signature page and any amended provisions, including the term dates. Financial
terms shall be provided if necessary for PacifiCare to properly adjudicate
claims or at Medical Group's discretion. Upon request, Medical Group shall make
all executed Medical Group Subcontracts available for review to the D.C.B.S.,
HCFA or OMAP.
In addition to any and all other provisions required to be included in
Medical Group Subcontracts by this Agreement, all Medical Group Subcontracts
shall require the Medical Group Physician or other subcontracting provider to
make all applicable books and records available at all reasonable times for
inspection, examination or copying by PacifiCare, HCFA or OMAP, and to retain
such books and records for a term of at least five (5) years from the close
of the fiscal year in which the Medical Group Subcontract is in effect.
3.18.1 SPECIAL RATE AGREEMENT - Medical Group shall submit written
special rate agreements for any services payable under the Hospital
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Control Program to PacifiCare for purposes of notification and claims
adjudication. Special rate agreements include special provider rates for a
specific Member, as well as rates that apply to all Members.
3.19 MEDICAL GROUP MEDICAL DIRECTOR - Medical Group shall designate a
Medical Group Physician to act as Medical Director for the PacifiCare Health
Plan program within the Medical Group. The Medical Group Medical Director shall
be responsible for providing medical management leadership within the Medical
Group. The duties of Medical group's Medical Director shall include, but are not
limited to: (i) overseeing the operation of the Medical Group Utilization
Management Committee; (ii) overseeing orientation and ongoing education of
Medical Group Physicians regarding the PacifiCare Health Plan and its
philosophy, goals, benefit provisions, policies and procedures on an ongoing
basis; (iii) overseeing operation of the Medical Group Quality Improvement
Committee; (iv) monitoring the performance of the Medical Group Physicians and
staff under the PacifiCare Health Plan for effective management of medical care
and maintenance of satisfactory Member relations; and (v) managing disputes that
may arise between Medical Group Physicians and Members regarding issues of
coverage and care. Medical Group's Medical Director's role may be divided
between more than one Medical Group Physician. Other duties may be assigned to
the Medical Group Medical Director only by mutual agreement between Medical
Group and PacifiCare.
3.20 PARTICIPATE IN PACIFICARE RISK-SHARING PROGRAMS - Medical Group
shall participate in and assume the rights and responsibilities of the following
PacifiCare risk-sharing programs, if applicable:
3.20.1 INDIVIDUAL STOP-LOSS PROGRAM - Medical Group agrees not to
participate in the ISL program with PacifiCare.
3.20.2 HOSPITAL CONTROL PROGRAM - As an incentive for the provision
of Covered Services to Members in a cost-efficient manner, Medical Group shall
participate in the Hospital Control Program as provided in (i) Exhibit E1 for
the Commercial Health Plan, and (ii) Exhibit E2 for the Secure Horizons Health
Plan.
3.20.3 LOW ENROLLMENT GUARANTEE PROGRAM - Medical Group shall
participate in the Low Enrollment Guarantee Program as provided in (i) Exhibit
F1 for the Commercial Health Plan, and (ii) Exhibit F2 for the Secure Horizons
Health Plan.
3.20.4 PRESCRIPTION SERVICES PROGRAM - Medical Group shall
participate in the Prescription Services Program as provided in (i) Exhibit G1
for the Commercial Health Plan, and (ii) Exhibit G2 for the PacifiCare Medicaid
Plan.
3.21 PACIFICARE POINT-OF-SERVICE PLAN - Medical Group shall provide
Covered Services to Members of the PacifiCare Point-of-Service Plan under the
terms and conditions of this Agreement and as further specified in Exhibit H.
3.22 EXCEPTIONAL NEEDS CARE COORDINATION - Medical Group shall ensure the
provision of Exceptional Needs Care Coordination ("ENCC") to OMAP Members who
are aged, blind and disabled in accordance with the requirements set forth in
Oregon Administrative Rules (OAR) 410-141-405.
3.23 OMAP REQUIREMENTS - Pursuant to the terms of the OMAP Agreement,
OMAP requires that the following provisions be included in this Agreement:
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(a) If the sums payable to Medical Group under this Agreement
exceed one hundred thousand dollars ($100,000), Medical Group shall comply with
the applicable standards, orders or requirements issued under Section 306 of the
Clean Air Act (42 U.S.C. Section 1857(h)), Section 508 of the Clean Water Act
(33 U.S.C Section 1386), Executive Order 11738 and Environmental Protection
Agency ("EPA") regulations (40 CFR Part 15), which prohibit the use of
facilities included on the EPA List of Violating Facilities. Any violations
shall be reported to OMAP, HHS and the EPA Assistant Administrator for
Enforcement (EN-329).
(b) Medical Group shall comply with any applicable mandatory
standards and policies relating to energy efficiency which are contained in the
State energy conservation plan issued in compliance with Energy Policy and
Conservation Act (Title III, Part C, Public Law 94-165).
(c) If the sums payable to Medical Group exceed ten thousand
dollars ($10,000), Medical Group shall comply with Executive Order 11246,
entitled "Equal Employment Opportunity," as amended by Executive Order 11375,
and as supplemented in Department of Labor regulations (41 CFR Part 60).
(d) Medical Group shall also comply with the requirements of the
federal Patient Self Determination Act (codified in 42 CFR Part 489, Subpart I)
and Oregon Revised Statute 127, as amended, pertaining to advance directives.
(e) Medical Group and any laboratories used by Medical Group shall
comply with the Clinical Laboratory Improvement Amendments (CLIA 1988) which
require the following: (a) all laboratory testing sites providing services under
this Agreement shall have either a CLIA certificate of waiver or a certificate
of registration along with a CLIA identification number. Those laboratories with
certificates of waiver shall provide only the eight (8) types of tests permitted
under the terms of their waiver. Laboratories with certificates of registration
may perform a full range of laboratory tests.
(f) Medical Group certifies, to the best of Medical Group's
knowledge and belief, that:
i. No federally appropriated funds have been paid or will
be paid, by or on behalf of Medical Group, to any person for influencing or
attempting to influence an officer or employee of any agency, a member of
Congress, an officer or employee of Congress, or an employee of a member of
Congress in connection with the awarding of any federal contract, the making of
any federal grant, the making of any federal loan, the entering into of any
cooperative agreement, and the extension, continuation, renewal, amendment, or
modification of any federal contract, grant, loan or cooperative agreement.
ii. If any funds other than federal appropriated
funds have been paid or will be paid to any person for influencing or attempting
to influence an officer or employee of any agency, a member of Congress, an
officer or employee of Congress, or an employee of a member of Congress in
connection with this federal contract, grant, loan, or cooperative agreement,
Medical Group agrees to complete and submit Standard Form-LLL "Disclosure Form
to Report Lobbying" in accordance with its instructions.
iii. Medical Group shall require that the language of this
certification be included in the Medical Group Subcontracts or any other
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subcontracts and that all Medical Group Physicians or other subcontractors shall
certify and disclose accordingly.
iv. Medical Group is solely responsible for all liability
arising from a failure by Medical Group to comply with the terms of this
certification. Additionally, Medical Group promises to indemnify OMAP for any
damages suffered by OMAP as a result of Medical Group's failure to comply with
the terms of this certification.
v. This certification is a material representation of fact
upon which reliance was placed when this Agreement was made or entered into.
Submission of this certification is a prerequisite for making or entering into
this Agreement imposed by Section 1352, Title 31, United States Code.
4. DUTIES OF PACIFICARE
4.1 ADMINISTRATION - PacifiCare shall perform all administrative,
accounting, enrollment, eligibility verification and other functions necessary
to the administration and operation of the various PacifiCare Health Plans and
this Agreement. PacifiCare shall provide, at its sole expense, all personnel,
facilities and equipment (including computer hardware and software) required to
enable PacifiCare to perform all such duties and functions in an accurate and
reasonably prompt manner.
4.2 BENEFIT INFORMATION - PacifiCare shall apprise all Members
concerning the type, scope and duration of benefits and Covered Services to
which Members are entitled under the applicable PacifiCare Health Plan.
PacifiCare shall maintain sufficient personnel and facilities to enable
PacifiCare to respond in a reasonably prompt manner to all inquiries by Members
and Medical Group concerning benefits and coverage.
4.3 ASSIST MEDICAL GROUP - PacifiCare shall assist and cooperate with
Medical Group in the development and implementation of procedures necessary to
carry out the provisions of this Agreement.
4.4 PROVISION OF DATA - PacifiCare shall provide Medical Group with
management information, statistical and other data reasonably necessary to carry
out the terms and conditions of this Agreement and for the operation of the
PacifiCare Health Plans. Such data includes, but is not limited to, a written
report, furnished to Medical Group within sixty (60) days after the end of each
quarter, reflecting the utilization of Medical Services and Hospital Services by
Medical Group Members.
4.5 ELIGIBILITY LISTS - PacifiCare shall maintain, update and distribute
to Medical Group, no later than the tenth (10th) day of each month, an
Eligibility List identifying for each month all Members who have selected or
been assigned to Medical Group and for whom Medical Group shall receive a
monthly Capitation Payment. Eligibility Lists shall be provided to Medical Group
in a mutually agreeable print and/or electronic data transmission format. Such
Eligibility List shall be accurate to the best of PacifiCare's ability based
upon information made available to PacifiCare by Subscriber Groups, HCFA and
OMAP as of a time not more than fifteen (15) days prior to the day the
Eligibility List is forwarded to Medical Group.
4.6 CREDENTIALING, QUALITY IMPROVEMENT AND UTILIZATION MANAGEMENT
PROGRAMS - PacifiCare shall establish and administer a credentialing,
recredentialing and peer review program, quality management and improvement
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program and utilization management program in compliance with applicable state
and federal law and NCQA standards. PacifiCare shall perform ongoing monitoring
and oversight to assess Medical Group's performance of any and all
credentialing, quality improvement and utilization management activities
delegated to Medical Group under this Agreement, including but not limited to,
monthly, quarterly and/or annual reports, meetings and on-site audits of Medical
Group to assure compliance with the standards required by PacifiCare's Quality
Improvement Committee, the D.C.B.S., HCFA, OMAP and the NCQA.
4.7 MEDICAL DIRECTOR - PacifiCare shall retain a physician licensed to
practice medicine in the State of Oregon to serve as its Medical Director.
PacifiCare's Medical Director, in consultation with the PacifiCare Quality
Improvement Committee, shall be responsible for: (i) all final medical and
mental health decisions relating to coverage or payment made pursuant to this
Agreement; (ii) all final recommendations regarding the Medical Necessity or
appropriateness of Covered Services or the site at which such services are
provided; and (iii) supervising the standards of professional medical care,
quality and utilization for Covered Services provided or arranged under the
PacifiCare Health Plan.
4.8 SERVICES RENDERED TO INELIGIBLE PERSONS OR NONASSIGNED MEMBERS -
PacifiCare shall pay Medical Group for Covered Services provided to an
ineligible person or to Members who have designated a Participating Provider
other than Medical Group as the Member's Primary Care Physician if such
ineligible person or such non-assigned Member was listed as a Medical Group
Member on the most current Eligibility List provided to Medical Group or was
confirmed verbally by PacifiCare as being an eligible Member or a Medical Group
Member. Medical Group shall submit proof to PacifiCare of having billed the
ineligible person or the person's legal guardian at least twice not less than
thirty (30) days apart. Within thirty (30) days following submission of proof of
billing, PacifiCare shall pay Medical Group eighty percent (80%) of the
remaining uncollected balance of charges at the Prevailing Rates. If subsequent
to payment by PacifiCare, Medical Group receives payment from any source,
Medical Group shall reimburse PacifiCare for any amount by which the total
payments received exceed one hundred percent (100%) of Medical Group's
Prevailing Rates.
4.9 MEDICAL GROUP SUBCONTRACTS - When PacifiCare makes payments directly
to health care providers for Covered Services rendered to Medical Group Members
pursuant to special rate agreements provided to PacifiCare pursuant to Section
3.18.1, it shall make them in accordance with such contract rates. PacifiCare
shall not charge Medical Group more than Medical Group's share of the Medical
Group contract rate on account of Covered Services provided by health care
providers under such contracts with Medical Group.
4.10 LIMITATION UPON TERMINATION OF HOSPITAL - PacifiCare may not
terminate without cause any Participating Hospital or other health facility
with which PacifiCare maintains a written agreement to provide Hospital
Services to Members and at which Medical Group Physicians serve as admitting
physicians for Members without the prior written consent of Medical Group.
For purposes of this Section 4.10, termination for cause shall include: (i)
termination for lack of financial resources as evidenced by financial records
of Participating Facility or repeated failures to pay valid outstanding
debts, (ii) failure to provide Hospital Services according to the standards
required by PacifiCare's Quality Improvement Committee, (iii) failure to
provide Hospital Services to Members in accordance with a written agreement
with PacifiCare, (iv) failure to maintain licensure, certification, insurance
or
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quality standards as required by a written agreement with PacifiCare; or (v)
breach of a material term, covenant or condition and subsequent failure to cure
in accordance with a written agreement with PacifiCare.
4.11 ASSIGNMENT OF MEMBERS - During the term of this Agreement,
PacifiCare shall include Medical Group's name in all materials provided to
Members, potential Members or purchasers of group coverage that list
Participating Providers in the Service Area. Until this Agreement is
terminated, Members shall be permitted to select Medical Group as their Primary
Care Physician and such selections shall be honored by PacifiCare, subject to
Section 12.2; provided, however, that PacifiCare shall not be required to permit
new Members to select Medical Group if Medical Group has failed to comply with a
Conformance Request based on capacity, poor access, poor administrative
operations or quality of care concerns within a reasonable period of time after
receipt of such Conformance Request. PacifiCare shall notify Medical Group
before suspending or limiting selection of Medical Group or any Medical Group
Physician by new Members.
4.12 INSURANCE - At all times during the term of this Agreement,
PacifiCare shall maintain professional liability insurance and general liability
insurance in the minimum amount of ten million dollars ($10,000,000) per
occurrence for coverage of PacifiCare and its officers, agents and employees.
Such insurance coverage shall include coverage for participants in PacifiCare's
quality improvement and peer review committees for claims arising out of their
service on such committees. Upon request, PacifiCare shall provide to Medical
Group a certificate evidencing such coverage.
4.13 SERVICE PROVIDED BY PUBLICLY FUNDED AGENCIES - PacifiCare shall
enter into written agreements with publicly funded agencies to provide the
following Medical Services to OMAP Members: (i) immunizations, and (ii) the
diagnosis and treatment of sexually transmitted diseases and other communicable
diseases. Medical Group shall not be responsible for the authorization or
Referral of OMAP Members to receive the services described in this Section 4.13.
5. COMPENSATION
5.1 CAPITATION PAYMENTS - PacifiCare shall pay Capitation Payments to
Medical Group for (a) the PacifiCare Commercial Plan, excluding the PacifiCare
Point-of-Service Plan, at the rates and according to the procedures set forth in
Exhibit C1; (b) the Secure Horizons Health Plan at the rates and according to
the procedures set forth in Exhibit C2; and (c) the PacifiCare Medicaid Plan at
the rates and according to the procedures set forth in Exhibit C3. Compensation
for the PacifiCare Point-of-Service Plan Members shall be at the rates and
according to the procedures set forth in Exhibit H. Capitation Payments shall be
due and payable by PacifiCare to Medical Group by the tenth (10th) day of each
month for the current month's Covered Services based on the current Eligibility
List.
5.2 ADDITIONAL PAYMENTS UNDER PACIFICARE PROGRAMS - PacifiCare and
Medical Group shall make additional payments to each other, if any are due, in
accordance with the terms of the applicable PacifiCare programs set forth in
Section 3.20 of this Agreement and the sub-sections therein. To the extent that
each party owes an amount to the other party under any such risk programs,
Medical Group agrees that PacifiCare shall combine the payment of all applicable
risk programs such that one aggregate payment is payable to or receivable from
Medical Group. In addition, amounts owed to PacifiCare may be offset against
future Capitation Payments. A fully detailed accounting of the
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results of each of the risk programs shall accompany the aggregate payment or
notice of amount due.
5.3 COLLECTION OF COPAYMENTS - To the extent provided under the
PacifiCare Commercial Plan or Secure Horizons Health Plan, Medical Group may
collect any applicable Copayment directly from a Commercial Member or Secure
Horizons Member, respectively, at or following the time Covered Services are
rendered. Medical Group shall not collect Copayments from OMAP Members under any
circumstances.
5.4 CAPITATION ADJUSTMENTS
5.4.1 ADJUSTMENTS TO CAPITATION BASED UPON ELIGIBILITY - Subject
to Section 5.4.4, PacifiCare shall be entitled to reduce retroactively
Capitation Payments made with respect to any Member if the Member is determined
to have been ineligible for the month for which the Capitation Payments were
made.
5.4.2 ADJUSTMENTS TO CAPITATION BASED UPON RETROACTIVE HCFA OR
OMAP ADJUSTMENTS - PacifiCare shall be entitled to reduce retroactively
Capitation Payments made with respect to any Secure Horizons Member any time
HCFA reduces retroactively the Monthly HCFA Payment made to PacifiCare on behalf
of those Secure Horizons Members. PacifiCare shall be entitled to reduce
retroactively Capitation Payments made with respect to any OMAP Member any time
OMAP reduces retroactively the Monthly OMAP Payment made to PacifiCare on behalf
of those OMAP Members.
5.4.3 ADJUSTMENTS TO CAPITATION BASED UPON COMPUTER SYSTEM ERRORS
OR FOR OTHER REASONS - PacifiCare shall not be entitled to reduce retroactively
Capitation Payments for any reason other than as stated in Sections 5.4.1 and
5.4.2, except that PacifiCare shall be entitled to reduce retroactively
Capitation Payments made on account of computer system errors or other errors in
the calculation of the Capitation Payments to the extent and only to the extent
the reduction exceeds five percent (5%) of the Capitation Payments made during
the month the error occurred.
5.4.4 TIME LIMIT ON ADJUSTMENTS - No Capitation Payment shall be
reduced at a time more than six (6) months after the end of the month during
which the Capitation Payment was made, and no Capitation Payment shall be
reduced at a time more than three (3) months after the end of the calendar year
during which the Capitation Payment was made. This time limit shall not apply
to adjustments as described in Section 5.4.2.
5.4.5 UNDERPAYMENTS - PacifiCare shall pay Medical Group the
amount of any Capitation Payment underpayment, or any other underpayment, as
soon as it is discovered. If PacifiCare receives health plan premiums for a
Member before such Member designates or is assigned to a Primary Care Physician,
and Medical Group or a Medical Group Physician is thereafter designated or
assigned as the Member's Primary Care Physician, PacifiCare shall pay Medical
Group a Capitation Payment on account of such Member effective as of the date on
which health plan premiums were first paid on behalf of such Member.
5.4.6 INTEREST - PacifiCare shall pay Medical Group interest at
the ninety (90) day Treasury Bill rate on any underpayment of an amount due
under this Agreement from the time the payment was due, provided that if the
payment is late on account of a computer system error or other error or on
account of a late eligibility determination, interest shall accrue from a time
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sixty (60) days after the due date. Medical Group shall pay PacifiCare interest
at the ninety (90) day Treasury Bill on any adjustment under Sections 5.4.1
through 5.4.3 from a time sixty (60) days after the Capitation Payment was made.
5.4.7 PAYMENT TERMS - If any adjustment under Sections 5.4.1
through 5.4.3 exceeds twenty percent (20%) of Medical Group's Capitation
Payments for the month during which PacifiCare makes a written claim for
adjustment, Medical Group shall be entitled to have the amount of the adjustment
deducted from its Capitation Payments in three (3) equal amounts over a three
(3) month period.
5.4.8 DOCUMENTATION - PacifiCare shall furnish Medical Group
written documentation in support of Capitation Payments made under this
Agreement and any retroactive adjustments to Capitation Payments made under
Sections 5.4.1 through 5.4.3. Such documentation shall be in a form that will
allow Medical Group easily to reconcile it with standard reports otherwise
furnished by PacifiCare under this Agreement. Medical Group or its
representatives shall be entitled, at Medical Group's expense, to conduct
periodic audits of PacifiCare's calculation of Capitation Payments in order to
verify the accuracy of the calculations. In addition, upon Medical Group's
request, PacifiCare shall provide Medical Group with an annual accounting
accurately summarizing all of the financial transactions between the parties for
the contract year.
5.5 CHANGES IN ACCEPTED TREATMENT - In the event that one or more
recognized changes in commonly accepted standards of treatment followed by the
preponderance of the medical profession result in the aggregate in an increase
in the cost of Medical Services, Medical Group and PacifiCare shall equally
share such increase in cost during the term of this Agreement and any Continuing
Care Period thereafter. PacifiCare's Medical Director, in consultation with
Medical Group and the Quality Improvement Committee, shall initially determine
whether a recognized change in commonly accepted standards of treatment followed
by the preponderance of the medical profession has occurred and shall determine
treatment protocols to be followed by Medical Group. Medical Group may request
review of such determinations by PacifiCare pursuant to Section 9.5 or
arbitration pursuant to Section 9.7.
5.6 SPECIAL CONDITIONS FOR EMERGENCY SERVICES - If Medical Group directs
a Member to use the Emergency Services of a hospital and PacifiCare determines
that such direction was inappropriate, PacifiCare may issue a written
Conformance Request to Medical Group. The Conformance Request shall serve as
notice that all subsequent inappropriate referrals may have a penalty applied.
If Medical Group thereafter makes an inappropriate referral for Emergency
Services of a hospital, PacifiCare may deduct the professional component of the
PacifiCare payment from Medical Group's Capitation Payment as a penalty for
improper referral. Medical Group may request review of any determination by
PacifiCare pursuant to this section by the PacifiCare Quality Improvement
Committee.
5.7 OMAP HOLD HARMLESS PROVISION - When providing Covered Services to
OMAP Members, Medical Group agrees to hold harmless (a) the State of Oregon and
OMAP and (b) OMAP Members in the event PacifiCare fails or is unable to pay for
Covered Services provided or arranged by Medical Group pursuant to this
Agreement. Medical Group shall include the requirements set forth in this
Section 5.7 in each Medical Group Subcontract.
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5.8 COORDINATION OF BENEFITS - PacifiCare shall cooperate with and
support, as mutually agreed upon by the parties, Medical Group's coordination of
benefits rights consistent with the requirements of Sections 5.8.1 and 5.8.2
below.
5.8.1 PACIFICARE IS PRIMARY - If a Member possesses health benefits
coverage through another policy which is secondary to PacifiCare under
applicable coordination of benefits rules, including the Medicare secondary
payor program, Medical Group shall accept payment from PacifiCare for Covered
Services as provided herein as full payment for such Covered Services, except
for applicable Copayments. Member shall have no obligation for any Surcharge,
regardless of whether secondary insurance is available.
5.8.2 PACIFICARE IS SECONDARY - If a Member possesses health
benefits coverage through another policy which is primary to PacifiCare under
applicable coordination of benefits rules, including the Medicare secondary
payor program, or if Member is entitled to payment under a workers' compensation
policy, Medical Group may pursue payment from the primary payor or workers'
compensation carrier consistent with applicable state and federal law and
regulations and Medical Group's contract, if any, with the primary payor. In
such event, PacifiCare shall have no responsibility to Medical Group other than
payment of Capitation Payments.
5.9 COLLECTION OF CHARGES FROM THIRD PARTIES; SUBROGATION - PacifiCare
shall cooperate with and support, as mutually agreed upon by the parties,
Medical Group's right to collect from third parties or to pursue subrogation as
described in this Section. If Medical Group is entitled to payment from another
third party (excluding a workers' compensation carrier or primary insurance
carrier under applicable coordination of benefits rules), PacifiCare hereby
assigns to Medical Group for collection, any claims or demands against such
third parties for amounts due for Covered Services provided by Medical Group
pursuant to this Agreement, subject to the following conditions:
(a) To the extent liens are utilized, Medical Group shall utilize
lien forms approved in advance by PacifiCare. PacifiCare shall not unreasonably
withhold such approval.
(b) Medical Group shall provide a copy to PacifiCare upon
requesting a lien from a Member and shall provide notice to PacifiCare upon
initiation of a subrogation claim relating to Covered Services provided to a
Member. Medical Group shall notify PacifiCare each time it pursues and each time
it obtains a signed lien from a Member.
(c) Medical Group shall not commence any legal or equitable action
against a third party to collect charges as described in this section without
obtaining the prior written consent of PacifiCare. It is agreed that reasonable
collection or demand letters shall not constitute the commencement of legal or
equitable action. Under no circumstances shall Medical Group commence any legal
or equitable action against a Member to obtain payment for Covered Services.
(d) Medical Group shall defend, indemnify and hold PacifiCare
harmless for all actions by Medical Group pursuant to this section.
(e) PacifiCare may rescind such assignment in total or on a
claim-by-claim basis by providing written notice of rescission to Medical Group.
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6. TERM AND RENEWAL OF AGREEMENT
6.1 TERM - The initial term of this Agreement shall be twelve (12)
months commencing on January 1, 1996 (the "Commencement Date"), unless
terminated earlier as provided in Section 7 of this Agreement. The term of this
Agreement shall automatically renew for an additional twelve (12) month term on
each successive anniversary of the Commencement Date, unless terminated earlier
as provided in Section 7.
6.2 NEGOTIATION - Until renewal of the initial term and any subsequent
term, the rates of compensation specified in this Agreement shall apply unless
otherwise mutually agreed upon by the parties in writing. If adjustments to any
terms under negotiation cannot be agreed upon by the parties by the renewal
date, the existing terms shall remain in effect until replaced by a renewed
Agreement.
7. TERMINATION
7.1 TERMINATION OF AGREEMENT WITHOUT CAUSE - Either party may terminate
this Agreement without cause by providing termination notice to the other party
at least one hundred and twenty (120) days prior to the annual anniversary of
the commencement date of this Agreement.
7.2 TERMINATION BY MEDICAL GROUP FOR CAUSE - Medical Group shall have
the right to terminate this Agreement upon written notice to PacifiCare in the
following circumstances:
(a) REVOCATION OF LICENSE - Immediately upon revocation,
suspension, expiration or nonrenewal of PacifiCare's license as a health care
service contractor or any other license, certificate or legal authority required
to be maintained by PacifiCare in the State of Oregon in order to perform its
obligations under this Agreement.
(b) NON-PAYMENT - PacifiCare's failure to make Capitation or
any other payments due to Medical Group hereunder within thirty (30) days of
such payment's due date and subsequent failure to cure such non-payment
within thirty (30) days after receipt of written notice by PacifiCare of such
non-payment.
(c) BREACH OF MATERIAL TERM AND FAILURE TO CURE - PacifiCare's
breach of any material term, covenant or condition of this Agreement and
subsequent failure to cure such breach, if curable, within thirty (30) days
after receipt of written notice by PacifiCare from Medical Group of such breach.
The notice of termination shall contain specific reference to the breaches which
constitute cause for termination. If PacifiCare is unable to cure its breach
within the thirty (30) day curing period, the Agreement shall terminate thirty
(30) days after the expiration of the curing period. The remedy of such breach
within the thirty (30) day notice period shall continue this Agreement for the
remaining term, subject to any of the rights of termination contained in this or
any other provision of this Agreement.
(d) INSOLVENCY - Voluntary or involuntary institution of any
rehabilitation, receivership, liquidation, bankruptcy or insolvency action or
proceeding by or against PacifiCare shall immediately and automatically
terminate this Agreement as of the date on which such action or proceeding is
instituted, unless within thirty (30) days of such date, Medical Group gives
PacifiCare or its duly authorized receiver or representative notice of Medical
Group's waiver of this provision.
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7.3 TERMINATION BY PACIFICARE FOR CAUSE - PacifiCare shall have the
right to terminate this Agreement or the participation of any Medical Group
Physician immediately upon written notice to Medical Group in the following
circumstances:
(a) LOSS OF LICENSE - Immediately upon revocation, suspension or
termination of any license, certificate or other legal authority required to be
maintained by Medical Group or the applicable Medical Group Physician in the
State in order to perform the services required under this Agreement or failure
to obtain or renew such license, certificate or authority.
(b) DEFICIENCIES IN QUALITY OF CARE - Medical Group's, or any
Medical Group Physician's, failure to provide or arrange Covered Services to
Members in accordance with the quality of care standards set forth in this
Agreement as reasonably determined by the PacifiCare Quality Improvement
Committee, and subsequent failure to correct such deficiencies within thirty
(30) days after receipt of written notice by PacifiCare of such deficiencies.
The notice of termination shall contain specific reference to the quality of
care deficiencies that support the Quality Improvement Committee's finding and
that constitute cause for termination. PacifiCare reserves the right to
immediately withdraw from Medical Group, or any Medical Group Physician, any or
all the Members assigned to Medical Group or the applicable Medical Group
Physician if Covered Services are not being provided according to the standards
required by this Agreement and/or the health, safety or welfare of Members is
endangered by the continued provision of Covered Services by Medical Group or
the applicable Medical Group Physician, as reasonably determined by PacifiCare's
Quality Improvement Committee.
(c) BREACH OF MATERIAL TERM AND FAILURE TO CURE - Medical Group's,
or any Medical Group Physician's, breach of any material term, covenant or
condition of this Agreement and subsequent failure to cure such breach, if
curable, within thirty (30) days after receipt of notice by PacifiCare from
Medical Group of such breach.
(d) FINANCIAL FAILURE - PacifiCare's reasonable determination of
Medical Group's anticipated inability to provide or arrange for Medical Services
as described herein due to the likelihood of Medical Group's lack of financial
resources, other than due to PacifiCare's non-payment of amounts due to Medical
Group hereunder, as evidenced by Medical Group financial records or Medical
Group's repeated failure to pay valid outstanding debts. If Medical Group has
furnished Certified Financial Statements to PacifiCare, PacifiCare's
determination that Medical Group lacks adequate financial capacity shall be
based upon an analysis of such financial statements. Failure of Medical Group to
provide reasonable evidence and assurances of financial stability and capacity
to perform under this Agreement within fifteen (15) days after receipt of notice
of the determination from PacifiCare shall result in termination of this
Agreement at the end of the fifteen (15) day period.
7.4 TERMINATION OF HCFA AGREEMENT OR PARTICIPATION IN SECURE HORIZONS
HEALTH PLAN - The obligations of PacifiCare and Medical Group with respect to
the Secure Horizons Health Plan shall immediately terminate upon the termination
or nonrenewal of the HCFA Agreement. Such termination of obligations shall be
accomplished by delivery of written notice to Medical Group of the date upon
which termination shall become effective. Termination or nonrenewal of the HCFA
Agreement shall not otherwise affect the obligations of either party under this
Agreement. In addition, either PacifiCare or Medical Group may terminate Medical
Group's participation in the Secure Horizons Health Plan only and the portions
of this Agreement related to the
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Secure Horizons Health Plan only, without affecting the remainder of the
Agreement, by providing sixty (60) days prior written notice of such
termination. In the event of such termination, the Continuing Care Period set
forth in Section 3.6 shall apply for Secure Horizons Members only.
7.5 TERMINATION OF MEDICAID AGREEMENT OR PARTICIPATION IN PACIFICARE
MEDICAID PLAN - The obligations of PacifiCare and Medical Group with respect
to the PacifiCare Medicaid Plan shall immediately terminate upon the
termination or nonrenewal of the Medicaid Agreement with OMAP. Such termination
of obligations shall be accomplished by delivery of written notice to Medical
Group of the date upon which termination shall become effective. Termination or
nonrenewal of the Medicaid Agreement with OMAP shall not otherwise affect the
obligations of either party under this Agreement. In addition, either
PacifiCare or Medical Group may terminate Medical Group's participation in the
PacifiCare Medicaid Plan only and the portions of this Agreement related to
the PacifiCare Medicaid Plan only, without affecting the remainder of the
Agreement, by providing sixty (60) days' prior written notice of termination
to the other party. In the event of such termination, the Continuing Care
Period set forth in Section 3.6 shall apply for OMAP Members only.
7.6 NOTIFICATION OF OMAP OF AMENDMENT OR TERMINATION - PacifiCare shall
notify OMAP in the event of an amendment or termination of this Agreement.
Notice shall be given by letter deposited in the U.S. Postal Service as first
class postage prepaid registered mail addressed to the following:
Oregon Department of Human Resources,
Human Resources Building
Office of Medical Assistance Programs
500 Summer Street NE
Salem, Oregon 97310-1014
7.7 REPAYMENT UPON TERMINATION - Within one hundred eighty (180) days
after the termination of this Agreement and any Continuing Care Period as
provided in Section 3.6, an accounting shall be made by PacifiCare of monies due
and owing either party and payment shall be forthcoming to settle such balance
within thirty (30) days of such accounting. Either party may request an
independent audit of PacifiCare's accounting by a mutually acceptable
independent certified public accountant and such audit shall be paid for by the
requesting party. The parties agree to abide by the findings of such independent
audit. Appropriate payment by the appropriate party, if any, shall be made
within thirty (30) days of such independent audit.
7.8 TERMINATION NOT AN EXCLUSIVE REMEDY - Any termination by either
party pursuant to this Section 7 shall not be an exclusive remedy, and such
terminating party may seek whatever action in law or equity as may be necessary
to enforce its rights under this Agreement.
8. RECORDS, CONFIDENTIALITY. RIGHT TO INSPECT, ENCOUNTER DATA
8.1 MAINTENANCE OF RECORDS - PacifiCare, Medical Group and the Medical
Group Physicians shall maintain such records and information as reasonably
necessary for the proper administration and operation of the PacifiCare Health
Plans in accordance with state and federal law, as further specified in Sections
8.1.1 through 8.1.3 below. The obligations created by this Section 8.1 shall
survive termination of this Agreement without regard to the cause of
termination.
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8.1.1 MEMBER MEDICAL RECORDS - Medical Group and the Medical Group
Physicians shall maintain Member medical records and related treatment
information in such form and containing such information as necessary to comply
with applicable state and federal law, including but not limited to, medical
histories, medical charts, records and reports from Specialist Physicians and
other Referral Providers, hospital discharge summaries, records of Emergency
Services and any other information necessary to disclose the quality,
appropriateness and timeliness of Covered Services provided to Members under
this Agreement. Medical Group shall make available to PacifiCare, upon
reasonable notice, such pertinent sections of Member medical records for the
purposes of conducting quality assurance and utilization review or for handling
and resolving Member grievances and appeals.
8.1.2 FINANCIAL RECORDS - Medical Group shall also maintain books of
account and records documenting all financial transactions and all direct and
indirect costs expended in the delivery of Covered Services to Members under
this Agreement, in such form and containing such information as required by
applicable state and federal law. Medical Group shall keep and maintain all
accounting books and financial records on a current basis in accordance with
general accepted accounting principles and standards for book and record
keeping.
8.1.3 RETENTION OF RECORDS - Medical Group and the Medical Group
Physicians shall retain all Member medical records, accounting books and
financial records for a period of at least three (3) years after final payment
is made under this Agreement and all pending matters are closed. In the event
that OMAP, HCFA, HHS or other authorized governmental regulatory agency
commences an audit, investigation, litigation or other action involving the
records of PacifiCare, Medical Group or the Medical Group Physicians before the
end of the three (3) year period, the records shall be retained until all issues
arising out of the audit, investigation, litigation or other action are resolved
or until the end of the three (3) year period.
8.1.4 COPYING CHARGES - Copies of records required by OMPRO will be
billed to PacifiCare at the OMPRO copy reimbursement rate of five cents
(5 cents) per page. Copies of records required for utilization management or
quality improvement review shall be at Medical Group's expense.
8.2 RIGHT TO INSPECT - Medical Group and the Medical Group Physicians
shall provide access at reasonable times upon demand to PacifiCare, the
D.C.B.S., HCFA, HHS, OMAP, the Comptroller General of the United States or any
authorized governmental agency, to inspect, evaluate or audit the facilities,
books and records of Medical Group and the Medical Group Physicians directly
relating to the performance of this Agreement and the Covered Services provided
to Members, including but not limited to, all phases of professional and
ancillary medical care provided to Members, Member medical records (subject to
the confidentiality restrictions set forth in Section 8.3 below), financial
records pertaining to the cost of operations and income received by Medical
Group for Covered Services rendered to Members and any other records or
information necessary to disclose the cost, performance, compliance, quality,
appropriateness and timeliness of Covered Services provided to Members under
this Agreement and the capacity of Medical Group to bear the risk of potential
financial losses. Such inspections or audits shall be conducted in accordance
with applicable federal and state law. Only Member medical records for the
period during which the Member is enrolled in a PacifiCare Health Plan shall be
subject to the inspection rights provided in this Section 8.2.
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The right of HCFA, HHS, the Comptroller General of the United States, OMAP
or the D.C.B.S. to inspect, evaluate and audit the facilities, books and records
of Medical Group shall extend through at least three (3) years after final
payment or settlement is made under this Agreement or any Medical Group
Subcontract and all pending matters are closed. If an audit, litigation or
other action involving the records is commenced by OMAP prior to the end of the
three (3) year period, the records shall be retained until all issues arising
out of the action are resolved or until the end of the three (3) year period,
whichever is later. Medical Group shall comply with any requirements or
directives issued by PacifiCare or governmental authorities as a result of any
such inspection, evaluation or audit. The obligations created by this Section
8.2 shall survive termination of the Agreement without regard to the cause of
termination of this Agreement.
8.3 CONFIDENTIALITY OF RECORDS - PacifiCare and Medical Group and the
Medical Group Physicians shall maintain the confidentiality of all Member
medical records and related treatment information in accordance with applicable
state and federal laws. To the extent required by law, PacifiCare and Medical
Group shall obtain a specific written authorization from Member prior to
releasing Member's medical records.
Subject to the requirement of 42 Code of Federal Regulations Part 431,
Subpart F, Medical Group and the Medical Group Physicians shall not use, release
or disclose any information concerning a Secure Horizons Member or OMAP Member
for any purpose not directly connected with the administration of PacifiCare's,
HCFA's or OMAP's responsibilities under this Agreement or under Title XIX of the
Social Security Act, except upon the written consent of the Secure Horizons
Member or OMAP Member or his or her attorney or legally responsible parent or
guardian. Medical Group and the Medical Group Physicians shall establish and
maintain procedures and safeguards to ensure that their officers, agents,
employees or subcontractors with access to Secure Horizons Member or OMAP Member
records understand and comply with this confidentiality provision.
8.4 ENCOUNTER DATA - Medical Group shall maintain and provide to
PacifiCare, on or about the fifteenth (15th) day of each month, the utilization
and other statistical data and reports pertaining to all Covered Services
provided to Members by Medical Group Physicians during the preceding month as
may be required by PacifiCare, HCFA, HHS or OMAP (the "Encounter Data"). Such
Encounter Data shall include, but is not limited to, a list of all Covered
Services provided to Members by Medical Group Physicians, data and reports
related to patient encounters by Medical Group Physicians, Referral activity,
laboratory and radiology utilization, utilization of Ancillary Services,
Emergency Services, maternity care and such other data or reports as are
specified by PacifiCare in the Provider Manual or required by HCFA, HHS or OMAP.
The frequency, format and medium of transmission of Encounter Data is described
in the Provider Manual. Medical Group shall be responsible for the costs of
submission of Encounter Data. No changes in the format or method of submission
of Encounter Data that result in increased cost to Medical Group, including
increased cost attributable to additional time of Medical Group staff, shall be
made without the consent of Medical Group.
8.5 FINANCIAL STATEMENTS - Medical Group shall provide to PacifiCare,
within forty-five (45) days after the close of each calendar quarter, copies of
its Certified Financial Statements. Medical Group shall also provide to
PacifiCare, within forty-five (45) days after the close of each fiscal year,
copies of its audited annual Certified Financial Statements. In addition,
Medical Group shall make its Certified Financial Statements available for
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review, as required, by the D.C.B.S., HCFA, OMAP or any other governmental
agency with regulatory or enforcement jurisdiction over PacifiCare, Medical
Group or this Agreement.
8.6 TRANSFER OR COPYING OF RECORDS UPON TERMINATION - Upon termination
of this Agreement and the expiration of any Continuing Care Period as provided
in Section 3.6 herein, Medical Group shall copy the medical records of all
Members who have selected or been assigned to Medical Group and transfer or
forward such records to PacifiCare or the Participating Provider designated by
PacifiCare who shall be assuming the Member's care following termination, within
a reasonable time not to exceed thirty (30) days after request. The cost of
copying and transferring such Member medical records shall be shared equally by
Medical Group and PacifiCare.
9. GRIEVANCE AND APPEALS PROCEDURE AND DISPUTE RESOLUTION
9.1 MEMBER GRIEVANCES AND APPEALS - PacifiCare shall be responsible for
resolving Member claims for benefits under the applicable PacifiCare Health
Plans and all other claims against PacifiCare. PacifiCare shall resolve such
claims utilizing the grievance and appeals procedure set forth in the applicable
PacifiCare Health Plan. PacifiCare shall notify Medical Group of any grievance
involving a Medical Group Member.
Medical Group shall assist and cooperate with PacifiCare in the handling
of such Member grievances and appeals, consistent with the terms of the
PacifiCare grievance and appeals procedure. Medical Group will provide staffing
and systems for handling informal grievances brought before Medical Group
directly. In the event a written grievance is presented to Medical Group or an
oral grievance is presented and not resolved within fifteen (15) days, Medical
Group will send such grievance to PacifiCare within two (2) days for handling
pursuant to the applicable PacifiCare Health Plan grievance procedure.
9.2 MEMBER CLAIMS AGAINST MEDICAL GROUP OR MEDICAL GROUP PHYSICIANS -
Member claims against Medical Group or a Medical Group Physician for
professional negligence or malpractice are not governed by this Agreement.
Member and Medical Group may seek any appropriate legal action to resolve such
claims deemed necessary. Upon the agreement of the Member and Medical Group,
PacifiCare shall make available the applicable PacifiCare Health Plan grievance
procedure for resolution of such claims. The PacifiCare grievance and appeals
procedure shall not be binding, except upon prior agreement by the parties to
the dispute. All other claims or disputes between a Member and Medical Group
relating to Covered Services provided under this Agreement and claims for
benefits under the PacifiCare Health Plan in which the Member is enrolled shall
be resolved pursuant to the PacifiCare grievance and appeals procedure as
provided in Section 9.1.
9.3 PAYMENT DISPUTES INVOLVING MEDICAL GROUP AND REFERRAL PROVIDERS -
Should a dispute arise between Medical Group and a Referral Provider concerning
a claim for payment for Medical Services rendered to Members, Medical Group or
the Referral Provider may submit a written complaint to PacifiCare. PacifiCare
shall notify Medical Group of any complaint submitted by a Referral Provider,
and Medical Group shall have at least twenty (20) days from receipt of notice to
respond and present information. A determination shall be made by the PacifiCare
Claims Manager based on a review of the facts by appropriate personnel,
including PacifiCare's Medical Director. All such determinations shall be made
in accordance with the terms and conditions of any Medical Group Subcontract
between Medical Group and the Referral Provider.
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If the Medical Group Subcontract provides for arbitration of disputes, Medical
Group or the Referral Provider may elect at any time to require resolution of
any dispute pursuant to such Medical Group Subcontract, in which event
PacifiCare shall have no further involvement in the matter.
In the event the PacifiCare Claims Manager determines that Medical Group
owes any amount to Referral Provider, Medical Group shall: (i) make such payment
within thirty (30) days of PacifiCare's determination; (ii) appeal the decision
to the Quality Improvement Committee; or (iii) require that the matter be
submitted to arbitration in accordance with any applicable arbitration provision
in the applicable Medical Group Subcontract. If, following an unappealed
decision adverse to Medical Group by the PacifiCare Claims Manager or by the
Quality Improvement Committee described in Section 9.6, Medical Group fails to
pay the amount due within thirty (30) days, PacifiCare may deduct the amount
owed from Medical Group's next monthly Capitation Payment and pay the Referral
Provider, unless the matter has been submitted to arbitration for resolution. If
the decision of the PacifiCare Claims Manager or the Quality Improvement
Committee described in Section 9.6 is adverse to the Referral Provider, notice
of the decision shall be given to Medical Group and the Referral Provider. The
Referral Provider shall not, under any circumstances, bill the Member for
Covered Services. In the event this Agreement has been terminated prior to
completion of the procedures set forth in this Section 9.3, and PacifiCare makes
payment to a Referral Provider in accordance with this Section 9.3, PacifiCare
may seek reimbursement from Medical Group through arbitration as described in
Section 9.7.
9.4 DENIED SERVICES - The procedures set forth in this Section 9.4 shall
apply whenever (i) a Member appeals a denial by Medical Group of the provision
of Medical Services or payment for Medical Services provided to Member on the
basis of a determination that such Medical Services are not Medically Necessary
or are experimental, or (ii) Medical Group appeals a denial by PacifiCare of
Medical Services provided to Members or payment for such services as not
Medically Necessary or as experimental.
9.4.1 INITIAL COMPLAINT - Upon receipt of notice of such an appeal,
PacifiCare shall promptly notify Medical Group and provide Medical Group with
copies of all information submitted by the Member. Within fourteen (14) days
after receipt of notice, Medical Group shall submit written or oral information
concerning the matter to PacifiCare's Medical Director or his or her qualified
designee. PacifiCare's Medical Director or designee shall consider all
information provided by Medical Group.
9.4.2 INITIAL DETERMINATION - PacifiCare's Medical Director or
designee shall make an initial determination, in accordance with the terms of
this Agreement, regarding whether the Medical Services in dispute are to be
provided to Member and whether payment for such Medical Services should be the
responsibility of: (i) Medical Group from Capitation Payments; (ii) PacifiCare,
with shared risk with Medical Group under the Hospital Control Program described
in Exhibit E1 through E3; or (iii) PacifiCare without shared risk with Medical
Group.
9.4.3 REVIEW OF INITIAL DETERMINATION - Medical Group may appeal the
decision of PacifiCare's Medical Director or designee to PacifiCare's Quality
Improvement Committee. Medical Group shall be given at least ten (10) days
notice of the date of the Quality Improvement Committee meeting at which the
matter will be considered. A representative of Medical Group may attend the
portion of the Quality Improvement Committee meeting addressing the matter, and
may present a statement to the committee. The decision of the
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Quality Improvement Committee shall be final and binding on PacifiCare and
Medical Group.
9.4.4 OPPORTUNITY TO RESPOND - If at any time following submission
of an initial complaint, the Member submits additional information concerning
the matter, PacifiCare shall promptly notify Medical Group and provide Medical
Group copies of all such information. Medical Group shall be given a reasonable
opportunity to respond to any such additional information before any action is
taken thereon by PacifiCare.
9.5 REVIEW COMMITTEE
9.5.1 COMPOSITION - The PacifiCare Review Committee shall be
composed of two representatives of PacifiCare and two representatives chosen by
majority vote of PacifiCare's Participating Medical Groups. Two alternate
representatives shall be elected by majority vote by such Participating Medical
Groups to serve in the event either of the regular members is affiliated with a
Medical Group involved or interested in a matter to be considered by the Review
Committee or is otherwise unable to participate in review of a matter by the
Review Committee. One of the regular representatives and one alternate selected
by the Participating Medical Groups shall be physicians involved in some or all
of the tasks described in Section 3.11. One of the regular representatives and
one alternate so selected shall be administrators of such groups.
9.5.2 MATTERS SUBJECT TO REVIEW - The Review Committee may consider
the following matters upon request of either PacifiCare or Medical Group: (i)
transfers of Members to or from Medical Group; (ii) a Conformance Request based
on any matters other than clinical patient care concerns; (iii) issues submitted
regarding clarification of benefits; (iv) disputes submitted regarding changes
in practice standards; or (v) other matters with the consent of Medical Group
and PacifiCare.
9.5.3 PROCEDURE - The party seeking review shall provide written
notice to the other party and to each member of the Review Committee of the
matter to be reviewed. If a member of the Review Committee is affiliated with
Medical Group or is unable to participate, the similarly situated alternate
member shall serve. Within fourteen (14) days after the date of the notice, the
Review Committee shall meet in person or by conference call to review the
matter, except that a meeting involving review of a Member transfer shall be
held within seven (7) days after the date of the notice. Representatives of
Medical Group and PacifiCare may present information to the committee at such
meeting.
9.5.4 DECISION - At the conclusion of the meeting described in
9.5.3, the Review Committee shall decide the matter by majority vote and shall
promptly notify Medical Group and PacifiCare of the result. The decision of the
Review Committee shall be binding on both parties unless either party submits
the matter to arbitration pursuant to Section 9.7.
9.6 QUALITY IMPROVEMENT COMMITTEE - Either PacifiCare or Medical Group
may request that the PacifiCare Quality Improvement Committee review and make a
final decision regarding the following: (i) disputes referred to it pursuant to
Section 9.3, subject to the right of Medical Group or a Referral Provider to
require that such dispute be decided pursuant to any applicable arbitration
provision included in the applicable Medical Group Subcontract; (ii) questions
or disputes pertaining to the Medical Necessity of Covered Services; (iii) any
Conformance Request involving clinical patient care matters; or (iv) questions
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or disputes relating to clarification of benefits. The party requesting review
shall do so by written notice to the Quality Improvement Committee and the other
party. Both parties shall be notified at least ten (10) days in advance of the
date and time of the meeting at which the Quality Improvement Committee will
consider the matter and shall have the opportunity to present information to the
Quality Improvement Committee at the meeting. The decision of the Quality
Improvement Committee shall be binding on both parties unless either party
submits the matter to arbitration pursuant to Section 9.7.
9.7 ARBITRATION - Any controversy, dispute or claim between PacifiCare
and Medical Group arising out of the interpretation, performance or breach of
this Agreement that has not been resolved pursuant to the dispute resolution
procedures otherwise provided for in this Agreement shall be resolved by binding
arbitration at the request of either party, in accordance with the rules of the
American Arbitration Association. Such arbitration shall occur in Portland,
Oregon, unless the parties mutually agree to have such proceeding in some other
locale. The arbitrators shall apply Oregon substantive law and federal
substantive law where state law is preempted. Civil discovery for use in such
arbitration may be conducted in accordance with the provisions of Oregon law,
and the arbitrator selected shall have the power to enforce the rights,
remedies, duties, liabilities, and obligations of discovery by the imposition of
the same terms, conditions and penalties as can be imposed in like circumstances
in a civil action by a court of competent jurisdiction in the State of Oregon.
The arbitrators shall have the power to grant all legal and equitable remedies
and award compensatory damages provided by Oregon law, except that punitive
damages shall not be awarded. The arbitrators shall prepare in writing and
provide to the parties an award including factual findings and the legal reasons
on which the decision is based. The arbitrators shall not have the power to
commit errors of law or legal reasoning, and the award may be vacated or
corrected pursuant to the term of Oregon law for any such error.
Notwithstanding the above, in the event either PacifiCare or Medical Group
wishes to obtain injunctive relief or a temporary restraining order, such party
may initiate an action for such relief in a court of law and the decision of
the court of law with respect to the injunctive relief or temporary restraining
order shall be subject to appeal only through the courts of law. The courts of
law shall not have the authority to review or grant any request or demand for
damages or declaratory relief.
10. NOTICE
Any notice required or permitted to be given by this Agreement shall be in
writing and may be delivered in person or sent by regular, registered or
certified mail or U.S. Postal Service Express mail, with postage prepaid, return
receipt requested, or by facsimile transmission, to either PacifiCare or Medical
Group at the addresses listed below, or at such other addresses as either
PacifiCare or Medical Group may hereafter designate to the other:
To PacifiCare: PacifiCare of Oregon
Five Centerpointe Drive
Suite 600
Lake Oswego, Oregon 97035-8650
To Medical Group: The Corvallis Clinic, P.C.
3680 NW Samaritan Drive
Corvallis, OR 97330
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Any notice sent by registered or certified mail, return receipt requested, shall
be deemed given on the date of delivery shown on the receipt card, or, if no
delivery date is shown, the postmark date. If sent by regular mail, the notice
shall be deemed given forty-eight (48) hours after the notice is addressed and
mailed with postage prepaid. Notices delivered by U.S. Express mail or overnight
courier that guarantees next day delivery shall be deemed given twenty-four (24)
hours after delivery of the notice to the United States Postal Service or
courier. If any notice is transmitted by facsimile transmission or similar
means, the notice shall be deemed served or delivered upon telephone
confirmation of receipt of the transmission, provided a copy is also delivered
via delivery or mail.
11. CONFIDENTIALITY
11.1 INFORMATION CONFIDENTIAL AND PROPRIETARY TO PACIFICARE - Medical
Group agrees to maintain confidential all information designated in this Section
11.1 which is proprietary to PacifiCare and which is confidential and contains
trade secrets of PacifiCare. The information which Medical Group shall maintain
confidential (the "Confidential PacifiCare Information") consists of: (a)
Eligibility Lists and any other information containing the names, addresses and
telephone numbers of Members which has been compiled by PacifiCare; (b) lists or
documents compiled by PacifiCare which include the names, addresses and
telephone numbers of employers, employer groups and employees responsible for
health benefits and the officers and directors of such employer groups; (c)
PacifiCare's Member, employer, administrative service and provider policies and
procedures manuals and all forms related thereto; (d) PacifiCare Subscriber
Agreements and the information contained therein; (e) the financial arrangements
between PacifiCare and any PacifiCare Participating Provider; and (f) any other
information compiled or created by PacifiCare which is proprietary to PacifiCare
and which PacifiCare identifies as proprietary to Medical Group in writing.
Medical Group shall not disclose or use the Confidential PacifiCare
Information for its own benefit or gain either during the term of this Agreement
or after the Effective Date of Termination; provided, however, that Medical
Group may use the Confidential PacifiCare Information to the extent necessary to
perform its obligations under this Agreement or upon express prior written
permission of PacifiCare. Upon the Effective Date of Termination, Medical Group
shall provide and return to PacifiCare all Confidential Information in its
possession in a manner to be specified by PacifiCare. Medical Group shall
cooperate with PacifiCare in maintaining the confidentiality of such
Confidential PacifiCare Information at all times.
11.2 INFORMATION CONFIDENTIAL AND PROPRIETARY TO MEDICAL GROUP - Medical
Group shall provide PacifiCare with a written description of all information
proprietary to Medical Group which is confidential and contains trade secrets of
Medical Group (the "Confidential Medical Group Information"). PacifiCare shall
maintain Confidential Medical Group Information confidential. PacifiCare shall
not disclose or use any Confidential Medical Group Information for its own
benefit either during the term of this Agreement or after the Effective Date of
Termination, except as required by a court or governmental agency of competent
jurisdiction. Upon the Effective Date of Termination, PacifiCare shall provide
and return to Medical Group all Confidential Medical Group information in its
possession in a manner to be specified by Medical Group. PacifiCare shall
cooperate with Medical Group in maintaining the confidentiality of the
Confidential Medical Group Information at all times.
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11.3 CONFIDENTIALITY OF THIS AGREEMENT - To the extent reasonably
possible, PacifiCare and Medical Group each agrees to maintain this Agreement as
a confidential document and to maintain the confidentiality of all terms
contained herein. PacifiCare and Medical Group each further agrees not disclose
the Agreement or any of its terms to a third party without the prior approval of
the other party, except where disclosure is required by law. Either party may
disclose this Agreement to professional advisors of such party. Medical Group
may disclose this Agreement to the Medical Group Physicians, provided such
Medical Group Physicians agree to maintain the confidentiality of this
Agreement.
12. MISCELLANEOUS PROVISIONS
12.1 PROTECTION OF MEMBERS - Medical Group shall not impose any
limitations on the acceptance of Members for care or treatment that it does not
impose on its other patients. Medical Group shall not seek, request or demand,
directly or indirectly, to have any Member's membership in the PacifiCare Health
Plan terminated or any Member transferred to another Participating Provider or
alternative health insurance plan because of such Member's need for, or
utilization of, Medically Necessary Covered Services. Medical Group shall not
refuse or fail to provide Medically Necessary Covered Services to any Member. If
any Medical Group Physician refuses or fails to provide Medically Necessary
Covered Services to any Member for any reason whatsoever, it shall remain the
responsibility of Medical Group to assure that such Member receives Medically
Necessary Covered Services from another Medical Group Physician, consistent with
the terms of this Agreement.
12.2 TRANSFER OF MEMBERS - Member generated transfers between
Participating Medical Groups and other Participating Providers shall be approved
by PacifiCare's Member Service Department at any time during the calendar year.
PacifiCare's Health Care Management Department may deny a Member transfer when
the transfer could potentially adversely affect or interrupt the Member's
required medical treatment plan. Transfer of a Member may be denied in the
following clinical situations, without limitation: (a) Member is hospitalized in
an acute or sub-acute facility; (b) Member is a transplant candidate; (c) Member
is a high-risk obstetrical patient; (d) Member is a third trimester obstetrical
patient; and (e) Member is receiving medical care, for an unstable, acute or
chronic medical condition.
PacifiCare's Health Care Management Department shall review all Member
transfer requests where continuity of patient care could be adversely affected
by the transfer. Medical Group may request the transfer or reassignment of a
Member assigned to Medical Group or a Medical Group Physician by PacifiCare to
another Primary Care Physician for cause or if the capacity of Medical Group is
overburdened to the extent that the provision of health care as required by this
Agreement is affected, provided that all provisions of this Agreement are met.
Upon request, PacifiCare shall allow Medical Group to withdraw from the care of
any Member when, in the reasonable professional judgment of a Medical Group
Physician, it is in the best interests of the Member to do so.
12.3 GOVERNING LAW - This Agreement and the rights and obligations of the
parties hereto shall be construed, interpreted and enforced in accordance with,
and governed by, the laws of the State of Oregon and applicable federal law and
the implementing regulations of the governmental agencies responsible for
enforcement of such laws, including but not limited to: the Oregon Health Care
Service Contractors Act, as amended, and the regulations promulgated
thereunder by the D.C.B.S.; the Health Maintenance Organization Act of 1973, as
amended, and the regulations promulgated thereunder by the HHS; Title XVIII
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of the Social Security Act ("Medicare"), as amended, and the regulations
promulgated thereunder by HHS and HCFA; and Title XIX of the Social Security Act
("Medicaid"), as amended, and the regulations promulgated thereunder by HHS and
OMAP. Any and all provisions required to be included in this Agreement by any
applicable law or regulations shall bind PacifiCare and Medical Group whether or
not specifically provided herein.
Medical Group shall comply with all Oregon and federal laws and
regulations governing the participating providers of health care service
contractors and the Medicare and Medicaid programs. Medical Group shall also
comply with any and all requirements in the HCFA Agreement and the OMAP
Agreement that are applicable to Medical Group as a subcontractor of PacifiCare
as a result of this Agreement and that are required to be included in
subcontracts entered into by PacifiCare for the performance of services under
the HCFA Agreement and the OMAP Agreement, which applicable provisions shall be
incorporated into this Agreement by this reference. In the event HCFA or OMAP
shall amend the HCFA Agreement or the OMAP Agreement, respectively, requiring
additional provisions to be included in subcontracts, those provisions shall be
incorporated into this Agreement by this reference. Copies of the HCFA Agreement
and the OMAP Agreement shall be provided to Medical Group prior to execution of
this Agreement, and any amendments thereto shall be provided to Medical Group on
the effective date of such amendments or as soon as reasonably possible
thereafter.
12.4 AMENDMENTS OR MODIFICATIONS
12.4.1 AMENDMENTS TO AGREEMENT - PacifiCare may provide notice to
amend this Agreement, including any of the Exhibits attached to this Agreement
and incorporated by reference, by providing thirty (30) days prior written
notice to Medical Group as necessary to comply with an enactment, amendment,
change or interpretation of federal or state law or regulations governing this
Agreement and the parties hereto. Such amendment shall be binding
upon Medical Group except as provided in Section 12.4.4 below. Other
amendments shall be effective only upon the mutual written agreement of the
parties.
12.4.2 AMENDMENTS TO PACIFICARE HEALTH PLANS - PacifiCare may add
new benefit(s) or Covered Service(s) or otherwise amend any particular
PacifiCare Health Plan by providing Medical Group thirty (30) days prior written
notice of such amendment. Such amendment shall be binding upon Medical Group
except as provided in Section 12.4.4 below.
12.4.3 AMENDMENTS TO PROVIDER MANUAL - PacifiCare may provide
notice to amend the Delegated Section of the PacifiCare Provider Policies and
Procedures Manual and any other standards or procedures applicable to Medical
Group or its Medical Group Physicians by providing Medical Group thirty (30) day
prior written notice of such amendments. Such amendment shall be binding upon
Medical Group except as provided in Section 12.4.4 below. Amendments to the
Provider Manual shall be consistent with the terms of this Agreement.
12.4.4 MATERIAL AMENDMENTS - In the event PacifiCare provides
notice of amendment pursuant to Section 12.4.1, 12.4.2 or 12.4.3 above, Medical
Group shall be bound by such amendment unless (i) Medical Group provides
PacifiCare written notice of objection within the thirty (30) day notice period,
and (ii) such change affects a material right, duty or responsibility of Medical
Group, and (iii) such change has a material adverse economic effect upon Medical
Group as reasonably demonstrated by Medical Group to PacifiCare. In such event,
Medical Group and PacifiCare shall seek to agree to an amendment to this
Agreement which satisfactorily addresses the
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effect on Medical Group's material duty or responsibility and reimburses the
material adverse economic effect caused to Medical Group. In such event, the
amendment shall not be effective until the parties amend the Agreement through a
written amendment signed by both parties.
12.4.5 REGULATORY APPROVAL - No modification or amendment of this
Agreement shall be effective until such proposed modification or amendment has
been approved or deemed approved by HCFA, HHS, OMAP or the D.C.B.S. if such
approval is required by applicable state or federal law or regulations. If such
regulatory approval is required, the proposed amendment or modification shall be
submitted to the regulating entity for prior approval at least thirty (30) days
before the proposed effective date or such other time period as is specifically
required by applicable state or federal law or regulation.
12.5 ASSIGNMENT - This Agreement and the rights, interests, obligations
or benefits hereunder shall not be assigned or transferred by either party and
shall not be subject to execution, attachment or similar process, nor shall the
duties imposed herein be subcontracted or delegated, without the prior written
approval of the other party. Neither PacifiCare nor Medical Group shall
unreasonably withhold consent to assignment. Notwithstanding the foregoing, but
subject to the terms and conditions set forth in this Section, either party may
assign or transfer this Agreement and its rights, interests, obligations and
benefits hereunder to any entity that has at least majority control of the party
or to any entity of which the party has at least majority control. In the event
the Medical Group assigns or transfers this Agreement to an entity that has at
least majority control of the Medical Group or to an entity of which the Medical
Group has at least majority control, if that entity has existing contracts with
PacifiCare, then the assignment and transfer shall not void or supersede the
contractual duty to service each Service Area, as that term is defined in any
PacifiCare contract, in accordance with the terms of the contract which would
have been applicable to the Service Area but for the assignment. In no event
shall any contract be assigned to any entity which does not assume or which
lacks financial capacity to service the financial obligations of the assigning
party to the other party, and any such assignment shall be void.
12.6 SOLICITATION OF PACIFICARE MEMBERS OR EMPLOYER GROUPS - Medical
Group and the Medical Group Physicians shall not directly or indirectly solicit
the patronage of PacifiCare's current Members or current Subscriber Groups
without PacifiCare's prior written consent. Solicitation shall include any
conduct, during the term of this Agreement and continuing for a period of one
(1) year after the effective date of termination of this Agreement, designed to
persuade Members or Subscriber Groups to discontinue their Subscriber Agreements
with PacifiCare or to encourage Members or Subscriber Groups to participate in a
health maintenance organization or other health care service plan offered by
Medical Group or its Medical Group Physicians. PacifiCare shall not consider the
following to be solicitation by Medical Group or the Medical Group Physicians:
(a) a request initiated and made directly by a Member or
Subscriber Group to Medical Group or a Medical Group Physician to recommend a
health care plan, any recommendations or discussions of any type by Medical
Group or a Medical Group Physician in response to that request, or any
negotiation or agreement between such Member or Subscriber Group and Medical
Group resulting from that request or such recommendations or discussions;
(b) a Member or Subscriber Group informing Medical Group of its
decision to terminate membership with PacifiCare and requesting from Medical
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Group or Medical Group Physicians advice on available health care plans,
advice of any type given by Medical Group or its Medical Group Physicians in
response to that request or any negotiation or agreement between such Member
or Subscriber Group and Medical Group resulting from that advice;
(c) solicitation of PacifiCare's current Members or current
Subscriber Groups by a health maintenance organization or other health care
service plan with which Medical Group participates;
(d) a notice to patients from Medical Group that it and its
Medical Group Physicians no longer participate in a PacifiCare Health Plan,
which notice may list or describe those health maintenance organizations or
other health care service plans with which Medical Group participates; or
(e) general advertising or solicitation not directed to specific
Members or Subscriber Groups.
Medical Group shall not use any Member or PacifiCare Subscriber Group
information for its own benefit or to gain advantage over any Member or
PacifiCare Subscriber Group during the term of this Agreement or for a period of
six (6) months after the effective date of termination of this Agreement. The
breach of this section during the term of this Agreement shall be grounds for
termination of this Agreement pursuant to Section 7.2 of this Agreement.
12.7 SOLICITATION OF MEDICAL GROUP PERSONNEL - During the term of this
Agreement and for a period of one (1) year after the effective date of
termination of this Agreement, PacifiCare shall not directly or indirectly
solicit physicians or other health care providers who are partners, shareholders
or employees of or under contract with Medical Group to leave Medical Group or
accept employment other than with Medical Group. General advertising concerning
employment opportunities shall not be considered direct or indirect solicitation
for purposes of this Section 12.7.
12.8 INCORPORATION OF PROVIDER MANUAL AND EXHIBITS - The Delegated
Sections of the Provider Manual and all exhibits attached to this Agreement
are an integral part of this Agreement and are hereby incorporated into this
Agreement by this reference.
12.9 ENTIRE AGREEMENT - This Agreement, including the Delegation Section
of the Provider Manual and the exhibits attached hereto and incorporated herein
by reference, contains all the terms and conditions between Medical Group and
PacifiCare and supersedes all other agreements, oral or otherwise, between
Medical Group and PacifiCare concerning the subject matter of this Agreement.
12.10 OTHER AGREEMENTS - Nothing in this Agreement shall prevent
PacifiCare and Medical Group from contracting with each other for provision of
services not covered by this Agreement.
12.11 PROVISIONS SEPARABLE - The invalidity or non-enforceability of any
term or provision of this Agreement shall in no way affect the validity or
enforceability of any other term or provision of this Agreement.
12.12 WAIVER OF BREACH - The waiver by either party of a breach or
violation of any provision of this Agreement shall not operate as or be
construed to be a waiver of any subsequent breach thereof.
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12.13 NO THIRD PARTY BENEFICIARY - Except as otherwise provided in this
Agreement, this Agreement is not intended to, nor shall be deemed, construed or
interpreted to, create any rights or remedies in any third party, including a
Member.
12.14 BINDING ON SUCCESSORS - This Agreement shall be binding upon, and
inure to the benefit of, the parties and their respective executors,
administrators, personal representatives, heirs, successors and permitted
assigns.
12.15 INTERPRETATION - In the event any claim is made by either party
relating to any conflict, omission or ambiguity in this Agreement, no
presumption or burden of proof or persuasion shall be implied by virtue of the
fact that this Agreement was prepared by or at the request of any particular
party or such party's legal counsel.
12.16 ATTORNEYS' FEES AND COSTS -- If any action at law or suit in equity
or arbitration is brought to enforce or interpret the terms of this Agreement or
to collect any monies due hereunder, the prevailing party shall be entitled to
reasonable attorneys' fees and reasonable costs, together with interest thereon
at the highest rate provided by law, in addition to any and all other relief to
which it may otherwise be entitled.
12.17 HEADINGS - The headings of the various sections of this Agreement
are inserted for the purpose of convenience and description only and do not
expressly, or by implication, limit or define or extend the specific terms of
the section so designated.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
dated below.
PACIFICARE OF OREGON, INC. THE CORVALLIS CLINIC, P.C.
By: /s/ John J. Wagner By: /s/ David L. Kobriger
--------------------------- -----------------------------
John J. Wagner Name: David L. Kobriger
Contract Administrator ----------------------------
(Please Print)
Date: 6/21/96 Date: 7-8-96
-------------------------- -------------------------
Tax I.D. # 93-0785777
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PACIFICARE OF OREGON, INC.
SCHEDULE OF EXHIBITS
MEDICAL GROUP SERVICES AGREEMENT
A Covered Services
A1 PacifiCare Commercial Health Plan
A2 Secure Horizons Health Plan
A3 PacifiCare Medicaid Plan
B Benefits Matrix
B1 PacifiCare Commercial Health Plan
B2 Secure Horizons Health Plan
B3 PacifiCare Medicaid Plan
C Capitation Payments
C1 PacifiCare Commercial Health Plan
C2 Secure Horizons Health Plan
C3 PacifiCare Medicaid Plan
D Individual Stop-Loss Program
D1 PacifiCare Commercial Health Plan
D2 Secure Horizons Health Plan
D3 PacifiCare Medicaid Plan
E Hospital Control Program
E1 PacifiCare Commercial Health Plan
E2 Secure Horizons Health Plan
F Prescription Services Program
F1 PacifiCare Commercial Health Plan
F2 PacifiCare Medicaid Plan
G PacifiCare Point-of-Service Plan
G1 Point of Service Capitated Program
G2 Point of Service Hospital Control Program
H Delegation of Credentialing, Recredentialing and Peer Review
I Delegation of Quality Improvement
J Delegation of Utilization Management and Review
K Delegation of Claims Payment
L Medical Group Service Area
M Access Guidelines
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EXHIBIT A1
COVERED SERVICES
PACIFICARE COMMERCIAL HEALTH PLAN
I. HOSPITAL SERVICES
A. COVERED SERVICES - Hospital Services are authorized by Medical Group
and are the financial responsibility of Participating Hospital. A summary of the
Hospital Services which are Covered Services includes the following:
1. INPATIENT HOSPITAL CARE - Commercial Member shall be assigned
semi-private units, unless medical necessity dictates private accommodations.
Where the Commercial Member requests private accommodations, not required for
medical purposes, the incremental difference in fee-for-services rates shall be
the responsibility of the Commercial Member. A summary of inpatient care
includes:
(a) Medical/surgical care, intensive care, cardiac care and
other special care units;
(b) Nursing services, meals, drugs, medications, blood
transfusions;
(c) Medical and surgical supplies and appliances;
(d) Inpatient rehabilitation services, such as: physical,
occupational and speech therapy.
2. SKILLED NURSING FACILITY CARE - Commercial Members shall be
assigned semi-private units, unless medical necessity dictates private
accommodations. Where the Commercial Member requests private accommodations,
not required for medical purposes, the incremental difference in the fee-for-
services rates shall be the responsibility of the Member. Skilled nursing
facilities must be Medicare licensed and approved.
3. HOSPITAL-BASED PHYSICIAN SERVICES - Professional component of
hospital-based physician service for either an inpatient hospital-based
service or an outpatient service, including outpatient surgery, provided
either in a hospital outpatient department or an ambulatory surgical center,
except for the charges of an anesthesiologist.
4. TRANSPORTATION EXPENSES - Approved ambulance services
provided within the Medical Group Service Area for Members. Where transfer of
Commercial Member from one facility to another is authorized by Medical Group or
PacifiCare, the cost of such transfer shall be a Hospital Service. The method
of transfer shall be determined by Medical Group, but Medical Group shall
coordinate all Member transfers to or from Participating Hospital with Hospital
personnel. Also included are paramedic services provided as Emergency
Services or Urgently Needed Services in the Medical Group Service Area.
5. EMERGENCY SERVICES IN THE SERVICE AREA - Emergency services
include emergency room charges and associated emergency room physician and
ancillary charges, inpatient medical and other services provided by an
appropriate source, that may NOT be delayed until facilities or physicians of
the Participating Hospital or Medical Group can be used without possible
serious effects to the health of the Commercial Member. Such services
must appear to be needed immediately to prevent the death of the Commercial
Member or serious impairment of his or her health, and are considered
Emergency Services as long as the transfer of the Member to the Hospital or
Medical
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Group is precluded because of the risk to the Member's health or the distance
and nature of illness involved would make such transfer unreasonable.
6. HOME HEALTH AND HOSPICE CARE (INCLUDING HOME IV THERAPY) - As
defined by Medicare as a minimum; however, additional home health care may be
provided as a covered benefit in lieu of hospitalization, as mutually agreed
to by Medical Group and Hospital.
7. OUTPATIENT SURGERY - Facility charges, supply charges and the
professional component of hospital-based physician services (E.G., laboratory
or radiology services), normally included in the charge for inpatient
procedures, for outpatient surgery provided at the hospital or an ambulatory
surgical center, except for the charges of an anesthesiologist.
8. OTHER HOSPITAL SERVICES:
(a) Devices surgically implanted (including lenses implanted
during cataract surgery) during a hospital confinement or during outpatient
surgery performed at the Hospital outpatient surgery department or an
ambulatory surgical center.
(b) Appealed Services - Hospital Services denied by Medical
Group and PacifiCare that are found on appeal or arbitration through the Member
grievance resolution process to be Hospital Services that Member was entitled
to have furnished under the PacifiCare Health Plan.
(c) Chemotherapy drugs.
B. EXCLUDED SERVICES - Hospital Services excludes the following:
1. Durable Medical Equipment (except as provided in A(1)(c) and
A(8)(a) above);
2. Medical Services in the Service Area as defined in Section II of
this Exhibit A1.
3. Outpatient prescription drugs
4. Vision materials (lenses and frames or contact lenses), except
lenses surgically implanted during cataract surgery during outpatient surgery
at a Hospital outpatient department or an ambulatory surgical center.
5. Emergent out-of-area hospital services.
6. Denied services.
7. Behavioral health services.
II. MEDICAL SERVICES
A. COVERED SERVICES - Medical Services provided in the Medical Group
Service Area are the financial responsibility of Medical Group. A summary of the
Medical Services include the following:
1. PHYSICIAN SERVICES - Commercial Members shall be entitled to
Medically Necessary inpatient and outpatient physician services included in
PacifiCare Health Plan. A summary of some physician services include the
following:
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(a) In-area inpatient and outpatient physician services
(including anesthesiology services)
(b) Outside Referrals to consultants, including
consultations performed by physicians in the emergency room
2. OUTPATIENT SERVICES - Such services include, among others:
(a) Professional component of outpatient services,
including outpatient surgery, except for the professional component of
hospital-based physician services for outpatient services, including surgery not
normally included in the charge for inpatient procedures, for such services
provided at a hospital outpatient department or an ambulatory surgical center,
including charges for an anesthesiologist.
(b) Short term, Medically Necessary rehabilitation
(speech, physical and occupational) therapy.
(c) Health education and social services.
(d) Immunizations.
(e) Periodic health evaluations.
(f) Hearing screening, including audiogram.
(g) Allergy testing and treatment, including allergy serum.
3. DURABLE MEDICAL EQUIPMENT, PROSTHETIC DEVICES AND MEDICAL
SUPPLIES
(a) Durable Medical Equipment (DME). On an outpatient basis,
when determined to be Medically Necessary.
(b) Prosthetic devices, except devices surgically implanted
during a Hospital confinement, or during outpatient surgery performed at a
hospital outpatient department or an ambulatory surgical center.
(c) Medical Supplies - Supplies used in connection with
treatment or to aid in the recovery of a medical condition.
4. OTHER SERVICES - Medical Services denied by Medical Group and
PacifiCare that are found on appeal or arbitration through the Member grievance
resolution process to be Medical Services that Member was entitled to have
furnished under the PacifiCare Health Plan.
B. EXCLUDED SERVICES - Medical Services exclude the following:
1. Professional component of hospital-based physician services
normally included in the Hospital's charge for inpatient procedures (except for
anesthesiology), for inpatient procedures and outpatient services, including
surgery, performed at Hospital or an ambulatory surgical center.
2. All other services included as a Hospital Service in Section I
of this Exhibit A1.
3. Outpatient prescription drugs.
4. Vision materials (lenses and frames or contact lenses), except
vision material following cataract surgery.
5. Chemotherapy drugs.
6. Emergent out-of-area professional services.
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7. Refractions (provided through PacifiCare's Vision Care Plan).
8. Denied services.
9. Behavioral health services.
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EXHIBIT A2
COVERED SERVICES
SECURE HORIZONS HEALTH PLAN
I. HOSPITAL SERVICES
Hospital Services are the financial responsibility of Hospital. A summary
of the services includes the following:
1. INPATIENT HOSPITAL CARE - Inpatient hospital care. Member shall be
assigned semi-private units, unless medical necessity dictates private
accommodations. Where the Member requests private accommodations, not required
for medical purposes, the incremental difference in fee-for-services in rates
shall be the responsibility of the Member. A summary of inpatient care includes:
(a) Medical/Surgical Care, Intensive Care, Cardiac Care and other
special care units;
(b) Nursing Services, meals, drugs, medications, blood transfusions;
(c) Medical and Surgical supplies and appliances;
(d) Rehabilitation services, such as: physical, occupational and
speech therapy;
2. SKILLED NURSING - Skilled nursing facility care. Patients shall be
assigned semi-private units, unless medical necessity dictates private
accommodations. Where the Member requests private accommodations, not required
for medical purposes, the incremental difference in the fee-for-services rates
shall be the responsibility of the Member. Skilled nursing facilities must be
Medicare licensed and approved.
3. HOSPITAL-BASED PHYSICIAN SERVICES - Professional component of
hospital-based physician service for either an inpatient hospital-based service
or an outpatient service, including outpatient surgery, provided either in a
hospital outpatient department or an ambulatory surgical center, except for the
charges of an anesthesiologist.
4. TRANSPORTATION EXPENSES - Approved Ambulance services for Members.
Where transfer of Member from one facility to another is authorized by Medical
Group or PacifiCare, the cost of such transfer shall be a Hospital Service. The
method of transfer shall be determined by Medical Group, but Medical Group shall
coordinate all Member transfers to or from Hospital with Hospital personnel.
Also included are paramedic services provided as Emergency Services or Urgently
Needed Services.
5. EMERGENCY SERVICES IN THE SERVICE AREA - Emergency services include
emergency room charges and associated emergency room physician and ancillary
charges, inpatient medical and other services provided by an appropriate source,
that may not be delayed until facilities or physicians of the Hospital or
Medical Group (or alternatives authorized by Medical Group) can be used without
possible serious effects to the health of the Member. Such services must appear
to be needed immediately to prevent the death of the Member or serious
impairment of his health, and are considered emergency services as long as the
transfer of the Member to the Hospital or Medical Group is precluded because of
the risk to the Member's health or the distance and nature of illness involved
would make such transfer unreasonable.
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6. HOME HEALTH AND HOSPICE CARE (INCLUDING HOME IV THERAPY) -
As defined by Medicare as a minimum; however, additional Home Health Care may be
provided as a covered benefit in lieu of hospitalization, as mutually agreed to
by Medical Group and Hospital.
7. OUTPATIENT SURGERY - Facility charges, supply charges and the
professional component of hospital based physician services (e.g., laboratory or
radiology services), normally included in the charge for inpatient procedures,
for outpatient surgery provided at the hospital or an ambulatory surgical
center, except for the charges of an anesthesiologist.
8. OTHER HOSPITAL SERVICES:
(a) Devices surgically implanted (including lenses implanted during
cataract surgery) during a hospital confinement, during outpatient surgery at a
Hospital Outpatient department or an ambulatory surgical center.
(b) Appealed Services - Hospital services denied by Participating
Medical Group and PacifiCare that are found on appeal or arbitration through the
Member grievance resolution process to be Hospital Services that Member was
entitled to have furnished through the PacifiCare Health Care Delivery system.
(c) Chemotherapy drugs.
9. HOSPITAL SERVICES EXCLUDE THE FOLLOWING:
(a) Durable Medical Equipment (except as provided in Section 8
above);
(b) Medical Services in the Service Area as defined by Exhibit L;
(c) Outpatient prescription drugs
(d) Vision materials (lenses and frames or contact lenses), except
lenses surgically implanted during cataract surgery during outpatient
surgery at a Hospital outpatient department or an ambulatory surgical center.
(e) Emergent out-of-area hospital services.
(f) Denied services
II. MEDICAL SERVICES
Medical Services provided in the service area are the financial responsibility
of the Medical Group. A summary of the services include the following:
1. PHYSICIAN SERVICES - Members shall be entitled to Medically Necessary
Medicare covered inpatient and outpatient physician services included in
PacifiCare's Secure Horizons, Medical and Hospital Plan. A summary of physician
services include the following:
(a) In-area inpatient and outpatient physician care including
anesthesiologist;
(b) Outside referrals to consultants including ER consultations
2. OUTPATIENT SERVICE - Such services include, among others:
(a) Professional component of outpatient services, including
outpatient surgery, except for the professional component of hospital based
physician services for outpatient services, including surgery not normally
included in the charge for inpatient procedures, for such services provided at
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a hospital outpatient department or an ambulatory surgical center, including
charges for an anesthesiologist.
(b) Short term, Medically Necessary rehabilitation (speech, physical
and occupational) therapy
(c) Health Education and Social Services
(d) Immunizations
(e) Periodic health evaluations
(f) Hearing Screening, including Audiogram
(g) Allergy testing and treatment, including allergy serum
3. DURABLE MEDICAL EQUIPMENT, PROSTHETIC DEVICES AND MEDICAL SUPPLIES
(a) Durable Medical Equipment (DME). Medical Group agrees to provide
such devices and aids on an outpatient basis, determined Medically Necessary.
(b) Prosthetic devices except devices surgically implanted during a
Hospital confinement, or during outpatient surgery performed at a hospital
outpatient department or an ambulatory surgical center.
(c) Medical Supplies - Supplies used in connection with treatment or
to aid in the recovery of a medical condition.
4. OTHER SERVICES - Medical Services denied by participating Primary Care
Physician (Medical Group) and PacifiCare that are found on appeal or
arbitration through the Member grievance resolution process to be Medical
Services that subscriber was entitled to have furnished through the PacifiCare
Secure Horizons health care delivery system.
5. MEDICAL SERVICES EXCLUDE THE FOLLOWING:
(a) Professional component of Hospital Based Physician services
normally included in the Hospital's charge for inpatient procedures (except for
anesthesiology), for inpatient procedures and outpatient services, including
surgery, performed at Hospital or an ambulatory surgical center
(b) All other services included as a Hospital Service in Exhibit A;
(c) Outpatient prescription drugs;
(d) Vision materials (lenses and frames or contact lenses),
except vision material following cataract surgery;
(e) Chemotherapy drugs;
(f) Emergent out-of-area professional services;
(g) Refractions (provided through PacifiCare's Vision Care Plan);
(h) Denied services;
(i) Outpatient mental health visits in excess of twenty (20) visits
per Member per year.
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EXHIBIT A3
COVERED SERVICES
PACIFICARE MEDICAID PLAN
MEDICAL AND HOSPITAL BENEFITS FOR OMAP MEMBERS:
OMAP Members are entitled to the Medical and Hospital Services and other
benefits set forth in this Exhibit A3.
A. SERVICE AREA: Linn and Benton Counties. In order to be eligible to
receive benefits under the PacifiCare Medicaid Plan, OMAP Members and enrolled
dependents must reside in the Service Area.
B. PROVIDER SYSTEM
(1) PRIMARY CARE PHYSICIAN
To receive Covered Services under this Agreement, each OMAP Member must
select or be assigned to a Primary Care Physician.
Referral by the Primary Care Physician is required for obstetrical-
gynecological and routine women's examinations. The only exception to the PCP
referral requirement is for therapeutic abortion ("TAB"). In the case of TAB,
the OMAP Member may self refer to a Participating Provider.
All Referral care must be preauthorized unless care is received due to a
medical emergency. All Referrals to Non-Participating Providers must be
preauthorized in writing in advance of treatment.
(2) NON-PARTICIPATING PROVIDER CARE
Referral to a Non-Participating Provider requires prior authorization
by OMAP Member's Primary Care Physician. PacifiCare will work with the Primary
Care Physician to assure use of Participating Providers whenever possible.
(3) HOSPITALIZATION
Should OMAP Member's Primary Care Physician or other Participating
Provider determine that an OMAP Member needs to be hospitalized, arrangements
will be made for the OMAP Member to be admitted in a Participating Hospital.
PacifiCare's Medical Director will review elective admissions or non-elective
Emergency hospitalization and will work with the Primary Care Physician to
assure that his or her treatment plan avoids unnecessary time in the hospital.
(4) CASE MANAGEMENT
PacifiCare has entered into case management agreements with certain medical
centers and specialized treatment programs to handle severe health problems that
necessitate services such as transplantation, neonatal care, open heart surgery,
neuromuscular treatment and spinal cord injury care.
(5) ALTERNATIVE SERVICES
PacifiCare shall have the right to pay benefits for alternative services
not otherwise covered by the PacifiCare Medicaid Plan if the following three
conditions are met:
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/ / alternative services are medically appropriate;
/ / major continuing claims expense is anticipated; and
/ / the Primary Care Physician and the PacifiCare's Medical Director
approve the use of alternative services.
Payment of benefits for alternative services shall be at PacifiCare's sole
discretion based on PacifiCare's evaluation of the individual case. The fact
that PacifiCare has paid benefits for alternative services for an OMAP Member
shall not obligate PacifiCare to pay such benefits for any other OMAP Member,
nor shall it obligate the payment of benefits for continued or additional
alternative services for the same OMAP Member. All amounts PacifiCare pays for
alternative services under this provision shall be considered Covered Services
for all purposes of this Agreement.
(6) EMERGENCY SERVICES
PacifiCare covers Emergency Services when provided or arranged by the
Primary Care Physician. In a MEDICAL EMERGENCY ONLY, as used hereinafter and
defined as "Emergency Services" in Section 1 of this Agreement, PacifiCare will
cover Emergency Services provided by the nearest appropriate facility even
though it may not be a Participating Facility. The procedures an OMAP Member
must follow in an Emergency situation are fully explained in the OMAP Member
Handbook.
C. DESCRIPTION OF COVERED SERVICES OR BENEFITS
All capitated services, supplies and equipment under this Agreement must be
rendered by a Participating Provider in order to be covered, except in the case
of Emergency Services or preauthorized Referral to a Non-Participating Provider.
However, certain services must also be authorized by PacifiCare even when such
care is provided or approved by a Primary Care Physician. The following
benefit description discusses the Covered Services, benefit maximums, benefit
limitations, exclusions from coverage, and conditions of service that apply to
the coverage provided under the PacifiCare Medicaid Plan.
If proper authorization is not obtained prior to receiving Medical
Services from other Participating Providers or Non-Participating Providers,
PacifiCare will deny those claims and the OMAP Member may be responsible for
charges incurred.
D. MEDICAL SERVICES (PHYSICIAN SERVICES)
Medical Services providing by a Participating Physician are covered as
explained in the following paragraphs:
(1) PREVENTIVE HEALTH CARE
PacifiCare covers the following Preventive Health Care benefits provided
through the OMAP Member's Primary Care Physician:
Periodic Health Exams: PacifiCare covers periodic health exams and EPSDT
(Early Prevention Screening, Detection and Treatment) according to the
following schedule:
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Infancy: Routine newborn care in the nursery plus six EPSDT schedule
screenings to a Primary Care Physician's office during the first year of life.
Children
Age 1: (Two office calls during the year). (EPSDT at 15 and 18
months of age.)
Children:
Age 2-6: One exam every year.
(EPSDT at 2, 3, 4, 5 and 6 years of age.)
Age 7-20: One exam every two years.
(EPSDT at 8, 10, 12, 14, 16, 18 and 20 years of age.)
Adults:
Age 21-34: One exam every four years.
Age 35 and above: One exam every two years.
NOTE: Adult periodic health exams are calculated according to age from the
previous date of service.
Eye and hearing screenings to determine the need for vision or hearing
correction are covered for children through age twenty (20) according to the
EPSDT schedule. Both eye and hearing must be provided by the child's Primary
Care Physician.
(2) EARLY AND PERIODIC SCREENING, DIAGNOSIS AND TREATMENT (EPSDI).
PacifiCare will provide health screening on a regularly scheduled basis for any
enrollee under twenty-one (21) years of age -- screening, diagnosis and
treatment will be carried out as provided in OMAP's guide for Medical-Surgical
Services. Records will be kept in the patient's record.
EPSDT screening will consist of at least:
1. Health and Developmental History,
2. Unclothed physical exam,
3. Developmental assessment,
4. Immunizations appropriate for age and health history,
5. Assessment of nutritional status,
6. Vision testing,
7. Hearing testing,
8. Laboratory procedures appropriate for age and population groups,
9. For children 18 months of age and over, referral to a dentist for
diagnosis and treatment.
Routine women's exams, including Pap smears, are covered once every
calendar year. Routine mammographic breast screening will be covered
according to the schedule endorsed by the American College of Obstetricians
and Gynecologists. Routine mammograms obtained more frequently than the schedule
will not be covered.
(3) IMMUNIZATIONS: PacifiCare covers immunizations, such as polio,
measles, rubella, whooping cough, hemophilus B (HIB), diphtheria, tetanus, and
mumps for both adults and children. Immunizations for the sole purpose of
travel are not covered.
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(4) FAMILY PLANNING AND INFERTILITY: Including Family Planning
counseling, information on birth control, insertion of IUD, vasectomy
and tubal ligation, are provided by Participating Physicians. Contraceptive
devices and contraceptive drugs are not covered.
All Medical Services for diagnosis and treatment of involuntary
infertility are not covered. X-ray, laboratory, and medications provided in
conjunction with infertility studies are not covered.
OMAP Members are not restricted to PacifiCare for family planning
services. PacifiCare is not responsible for family planning services unless
provided or referred by PacifiCare.
Admission to the hospital or outpatient surgical center for family
planning services must be preauthorized by the admitting Participating
Physician if provided by PacifiCare.
(5) NUTRITIONAL COUNSELING: Is covered, as Medically Necessary.
(6) DIABETES SELF-MANAGEMENT EDUCATION PROGRAMS: These programs are
covered when conducted by a Participating Provider in an outpatient setting.
(7) PRIMARY CARE PHYSICIAN HOME AND OFFICE VISITS
PacifiCare covers home and office visits provided by an OMAP Member's
Primary Care Physician for treatment of illness and injury.
(8) REFERRAL PHYSICIAN OFFICE VISITS
PacifiCare also covers Referrals by Primary Care Physicians to other
professional providers. Referrals to Non-Participating Providers who render
specialty care must be preauthorized in writing by PacifiCare before such care
is received.
(9) THERAPEUTIC INJECTIONS
Therapeutic injections, such as allergy shots, are covered when given
in a Participating Provider's office, except when comparable results can be
obtained safely with home self-care, or through oral use of a prescription drug.
RAST (Radioallergosorbent) testing must be ordered by a Participating
allergist in order to be eligible for benefits.
Vitamin and mineral injections are not covered unless Medically Necessary
for treatment of a specific medical condition.
Hepatitis B immunizations are covered only for newborns, well-child
visits, and high risk individuals who meet PacifiCare criteria and must be prior
authorized.
(10) HOSPITAL VISITS
Physician visits are paid during a period of covered hospital confinement
when rendered by the Primary Care Physician who hospitalizes the OMAP Member.
PacifiCare will pay for one physician visit per day of hospital confinement
unless further visits are Medically Necessary to manage a critical situation.
PacifiCare will cover a Medically Necessary inpatient consultation
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ordered by the attending physician, however, ongoing care must be rendered by
the attending physician.
(11) SURGERY
PacifiCare covers total surgical care when such surgery is approved by an
OMAP Member's Primary Care Physician and authorized by PacifiCare. PacifiCare
then pays for the preauthorized services of surgeons, and the additional
Medically Necessary services of assistant surgeons, anesthesiologists or
registered anesthetists.
(12) COSMETIC SURGERY
Surgery that improves appearance without restoring an impaired body
function is not covered. All "reconstructive" procedures which are partially
cosmetic in nature must be pre-authorized. Preauthorization will be denied if
the procedure is found NOT to be Medically Necessary in the judgment of
PacifiCare's Medical Director subject to OMAP Member's right of appeal under
Oregon Administrative Rules.
In all cases surgical breast augmentation and nasal rhinoplasty are not
covered services.
In certain specific cases medically necessary breast reduction is covered.
PacifiCare will use OMPRO'S criteria.
Post-mastectomy reconstructive procedures with or without prostheses,
including use of tissue expanders, etc., are not covered. Revisions of
reconstructions are not covered.
Congenital cosmetic deformities may be pre-authorized for surgical repair
on a case by case basis. Hormonally related conditions may be reviewed for
coverage as an enrollee's development warrants. In all cases, the decision
regarding coverage of congenital cosmetic conditions shall be made by
PacifiCare's Medical Director subject to OMAP Member's right of appeal under
Oregon Administrative Rule.
Any form of acne surgery, including cryotherapy, dermabrasion, and excision
of acne scarring will be covered only when such surgery is preauthorized by
PacifiCare and when performed directly by a Participating Physician.
Temporomandibular joint (TMJ) medical or dental management including
surgery is not covered.
(13) MATERNITY CARE
All Medically Necessary care for pregnancy, newborn delivery and related
conditions are covered, the same as any other condition that requires medical
and surgical care.
As in all cases of routine care, BENEFITS ARE PAYABLE ONLY WITHIN THE
SERVICE AREA and only when provided by Participating Providers. Delivery at
term can be anticipated and is not considered a medical emergency for purposes
of this Agreement. An OMAP Member may lose benefits for delivery of a child if
the OMAP Member travels out of the Service Area and delivers while away, unless
PacifiCare can be satisfied that the choice to travel was compelling and the
delivery unexpectedly early. A Participating Physician should be
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consulted to ascertain the risk of an out-of-area delivery before traveling late
in pregnancy.
E. HOSPITAL INPATIENT SERVICES
(1) ACUTE CARE
When a Participating Provider obtains preauthorization and admits Members
to a hospital for acute care, Contractor will cover:
_ semi-private room and board;
_ isolation, coronary or other special acute care units, when
Medically Necessary; and
_ Hospital Services and supplies necessary for treatment and
furnished by Participating Hospital, such as operating and recovery rooms, blood
and blood components, traction equipment and special diets.
Coverage for take home prescription drugs following a period of
hospitalization and dispensed by the hospital will be limited to a three-day
supply.
Referrals to a Non-Participating Hospital must be preauthorized by
PacifiCare unless a medical emergency necessitates such admission.
A preauthorized hospitalization in a Non-Participating Facility will be
covered.
In a medical emergency, benefits paid to a Non-Participating Facility will
continue until the OMAP Member can be safely transported to one of PacifiCare's
Participating Facilities for continued hospitalization. OMAP Members refusing
transport to a Participating Facility when it is safe for them to transfer will
forfeit continued benefits for that hospitalization and all concurrent
Non-Participating Provider care.
(2) LICENSED NURSING FACILITY PROVIDING SKILLED CARE:
As an alternative to hospitalization, the PacifiCare can authorize up to
sixty (60) days per calendar year in a licensed nursing facility that provides
skilled care. In order to be covered, the care must be Medically Necessary and
preauthorized by the Primary Care Physician.
PacifiCare does not provide benefits for routine nursing care, self-help or
training, personal hygiene or custodial care. Nor does PacifiCare provide
benefits for care in a licensed nursing facility providing skilled care in cases
of senile deterioration, mental deficiency or retardation, and psychotic or
psychoneurotic conditions.
F. REHABILITATION
Physical, occupational and speech therapy will be covered to restore or
improve lost function caused by illness, injury, or developmental delay when; 1)
prescribed by a Participating Provider and 2) preauthorized; and 3) delivered
by a Participating Provider.
Children referred for speech therapy by a participating professional
provider may have an initial evaluation by a speech therapist who contracts
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with PacifiCare. The results of the evaluation will be reviewed by the OMAP
Member's Primary Care Physician who has authority to determine whether speech
therapy is Medically Necessary.
The standard PacifiCare shall use to authorize all rehabilitation therapies
shall be the Medical Necessity for such services.
In all cases, specialized cognitive rehabilitation programs are not
covered.
G. AMBULATORY SERVICES
(1) OUTPATIENT SURGERY
When prior authorized, PacifiCare covers operating rooms and recovery
rooms, surgical supplies and other services ordinarily provided by a hospital or
surgical center that subcontracts with PacifiCare to perform "Outpatient
surgery" (surgery that does not require an overnight stay in a hospital).
Certain surgical procedures are covered only when performed as outpatient
surgery. Eligible surgery performed in a Participating Provider's office is
covered.
(2) X-RAY AND LAB
PacifiCare covers diagnostic x-rays and laboratory tests related to
treatment of a covered illness or injury.
(3) THERAPEUTIC X-RAY
PacifiCare covers radium, radioisotopic and x-ray therapy.
(4) IMAGING AND INVASIVE DIAGNOSTIC PROCEDURES
Imaging services, such as MRI and CT scans, and diagnostic procedures that
require entry into the body cavity, such as angiograms and endoscopy, are
covered when prior authorized.
H. EMERGENCY CARE
(1) EMERGENCIES WITHIN THE SERVICE AREA
In an emergency, OMAP Members should always call their Primary Care
Physician first. The Primary Care Physician will advise the most medically
prudent course of action (E.G., whether to come to the office or to the
emergency room of a Participating Hospital.
PacifiCare recognizes that certain medical emergencies may prevent OMAP
Members from initially seeking care from their Primary Care Physician. In such
an instance, OMAP Members should seek care from the nearest appropriate facility
and then call the Primary Care Physician within twenty-four (24) hours of the
incident, or as soon thereafter as possible.
(2) EMERGENCIES OUTSIDE THE SERVICE AREA
When OMAP Members have medical emergencies outside of the Service Area,
medical care may be obtained from the closest appropriate facility, such as a
clinic or physician's office, urgent care center, or hospital emergency room.
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The OMAP Member must then notify his or her Primary Care Physician within
twenty-four (24) hours after the occurrence, or as soon thereafter as possible.
If OMAP Members are hospitalized due to a medical emergency outside the
Service Area, the Primary Care Physician and the Medical Director will monitor
their condition and will determine when the OMAP Member can be transferred to a
Participating Facility. PacifiCare does NOT provide benefits for care beyond
the date the Primary Care Physician and PacifiCare's Medical Director
determine an OMAP Member can be safely transferred.
If an OMAP Member is outside the Service Area and has an urgent need for
medical care, PacifiCare shall provide the same benefits that apply to a
medical emergency. The following ARE NOT considered to be eligible for out-
of-area urgent care coverage:
- routine adult physical examinations, women's examinations,
wellbaby and child care, immunizations or eye examinations;
- diagnostic work-ups for chronic conditions; and
- elective surgery and/or hospitalization unless prior authorized
by PacifiCare as services not available from Participating Providers.
(3) AMBULANCE TRANSPORTATION
Emergency ground or air ambulance transportation is covered. Transportation
required by PacifiCare to return an OMAP Member into the Service Area to obtain
continuing care is covered when required by PacifiCare to continue care after a
Medical Emergency.
I. OTHER SERVICES
(1) HOME HEALTH CARE
Medically Necessary home health care is covered when prior authorized by
PacifiCare. Such visits must be provided by an approved home health agency.
A treatment plan from the home health agency also must be reviewed by
PacifiCare before benefits will be approved. At a minimum the home health
agency must:
- provide skilled nursing and other therapeutic services in the
place of residence of its patients;
- provide for the supervision of services by a physician, a
registered nurse or a licensed practical nurse;
- maintain clinical records of all patients;
- receive prior authorization in writing from PacifiCare to
provide home health services in each case.
Services for home health care are subject to all contract limitations.
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(2) DURABLE MEDICAL EQUIPMENT AND SUPPLIES
PacifiCare provides durable medical equipment and supplies according to
OMAP program rules and regulations as specified in the OMAP provider guide,
Durable Medical Equipment and Supplies. Medical supplies used, and casts
applied, in a Participating Provider's office are covered along with surgical
implants, including such items as pacemakers and artificial joints.
(3) PODIATRY SERVICES
Services of podiatrists are covered when the OMAP Member is Referred by his
or her Primary Care Physician for diagnosis and treatment of A SPECIFIC CURRENT
PROBLEM.
J. LIMITATIONS
Certain benefits for Covered Services are limited, as shown in the
following paragraphs:
(1) PRESCRIPTION DRUGS
The following medications and accessories are covered only when prescribed
by a Participating Physician and obtained at pharmacies contracting with
PacifiCare. The Participating pharmacies will be formulary compliant in
dispensing policies.
(a) THE FOLLOWING ARE COVERED:
- Drugs for which a prescription is required by law.
- The following non-legend drugs and items, regardless of
strength or dosage form, whether singly or in combination, on prescription ONLY:
- Gastro-Intestinal:
Aluminum Hydroxide
Milk of Magnesia
Tums
- Topical Products:
Hydrocortisone 0.5%, 1%
Neosporin ointment
NIX
Lotrimin A/F
- Vitamins/Minerals:
Ferrous Sulfate
- Expectorants and Cough Syrups:
Robitussin DM, CF, Plain
- Antiemetic:
Mcclizine
- Analgesics:
Acetaminophen
Aspirin
Ibuprofen
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- Antihistamines:
Chlorpheniramine
- Decongestants:
Pseudoephedrine
- Others:
Niacin
Pedialyte
Sodium Chloride for inhalation
- Insulin. Disposable insulin needles/syringes.
- Dextroamphetamine (e.g. Dexedrine) Methamphetamine
(e.g. Desoxyn)
- Tretinoin, all dosage forms (e.g. Retin-A), for individuals
through the age of 25 years. For individuals over the age of 25 years a
preauthorization by a Participating Provider is required.
- Compounded medication of which at least one ingredient is a
prescription legend drug.
- Any other drug which under the applicable state law may only
be dispensed upon the written prescription of a physician or other lawful
prescriber.
(b) THE FOLLOWING ARE NOT COVERED:
(1) Drugs and medications when used for cosmetic purposes.
(2) Non-legend drugs other than those specified in
subparagraph (a), above.
(3) Anorectics (any drug used for the purpose of weight
loss), except for those listed above.
(4) Drugs related to non-covered transplants.
(5) Infertility medications.
(6) Psychotherapeutic Drugs related to the treatment of
mental illness or chemical dependency. (Tranquilizers, Anti-Depressants,
Lithium Products, Sedatives, Methadone, Hypnotics, Etc.)
(7) Dental prescriptions.
(8) Contraceptives, oral or other, whether medication or
device, regardless of intended use.
(9) DESI drugs.
(10) Immunization agents, biological sera, blood or blood
plasma.
(11) Immunosuppressants, primarily indicated for organ
transplantation unless PacifiCare has specifically agreed to cover the
transplant
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(12) Lewnorgestrel (Norplant)
(13) Minoxidil (Rogaine) for the treatment of alopecia.
(14) Nicorette (or any other drug containing nicotine or
other smoking deterrent medications)
(15) Yohimbine (Yocon)
(16) Charges for the administration or injection of any drug
(including Methadone treatment programs).
(17) Prescriptions which an OMAP Member is entitled to receive
without charge from any Worker's Compensation Laws.
(18) Drugs labeled "Caution-limited by federal law to
investigational use," or experimental drugs, even though a charge is made to the
individual.
(19) Medication which is to be taken by or administered to
an individual, in whole or in part, while he or she is a patient in a licensed
hospital, rest home, sanitarium, extended care facility, convalescent
hospital, nursing home or similar institution which operates on its premises, or
allows to be operated on its premises, a facility for dispensing
pharmaceuticals.
(20) Any prescription refilled in excess of the number
specified by the Participating Physician, or any refill dispensed after one year
from the Participating Physician's original order.
(c) DISPENSING LIMITATIONS FOR DRUGS
- The amount normally prescribed by Participating Physician,
but not to exceed a thirty (30) day supply.
(2) TRANSPLANTS
PacifiCare will provide transplant benefits for Medically Necessary
transplantation procedures for kidney and cornea.
TERMS AND CONDITIONS. Covered Services and benefits are provided only
in accordance with the following terms and conditions:
- PacifiCare determines that the procedure represents the safest
and most effective method of treatment.
- PacifiCare provides a written referral for care to transplant or
hemodialysis facility selected by PacifiCare from a list of facilities it has
approved.
- If, after referral, either PacifiCare or the medical staff of
the referral facility determines that the OMAP Member does not satisfy its
respective criteria for the services involved, PacifiCare's obligation is
limited to paying for Covered Services provided prior to such determination.
- Neither PacifiCare nor Participating Physicians undertake to
provide a donor or a donor organ or to assure the availability of a donor or
of a donor organ or the availability or capacity of referral transplant
facilities approved by PacifiCare.
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- If the organ recipient is covered under this contract,
PacifiCare will pay for donor costs, whether or not the donor is covered under
this contract. "Donor costs" refer to charges associated with removing the
tissue from the donor's body and preserving or transporting it to the site where
the transplantation is performed as well as any other charges pertaining to
locating and procuring the organ. If the donor is covered under the
PacifiCare Medicaid Plan and the recipient is not, PacifiCare will not pay any
benefits toward donor costs. Complications and unforeseen effects of the
donation will be covered like any other illness.
- Living expenses are not covered for any person, including the
OMAP Member.
- Transportation is not covered for any person, including the
OMAP Member.
(3) MEDICAL BENEFIT EXCLUSIONS
PacifiCare will not cover the following:
(a) Services or supplies rendered by a Non-Participating
Provider when such care has not been preauthorized by PacifiCare, except in
cases involving a medical emergency.
(b) Services or supplies rendered by Participating Providers,
other than the OMAP Member's Primary Care Physician, if not referred by the
Primary Care Physician and preauthorized through PacifiCare.
(c) Services or supplies received by OMAP Members before coverage
under the PacifiCare Medicaid Plan begins, or after coverage under the
PacifiCare Medicaid Plan ends. For hospitalization, an occasion of service
begins upon admission.
(d) Services or supplies which are, in PacifiCare's judgment,
experimental or investigational for the diagnosis of the OMAP Member being
treated. Also excluded are services and supplies which support or are
performed in connection with the experimental or investigational treatment. For
purposes of this exclusion, experimental or investigational services include,
but are not limited to, any services or supplies which, at the time the services
are rendered and for the purpose and in the manner they are being used:
- have not yet received full FDA approval for other than
experimental, investigational, clinical testing; or
- are performed under a written research protocol by the provider;
or
- any that are not recognized by medical practitioners as
conforming to accepted medical practice in the state of Oregon.
(e) Self-help, training, or instructional programs, including, but
not limited to, how to use durable medical equipment or how to care for a person
in the family.
(f) Services or supplies provided for treatment of addiction to
tobacco, tobacco products or nicotine substitutes, including hypnosis,
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biofeedback, forms of relaxation training or counseling used to modify tobacco
use.
(g) Services otherwise available:
- services or supplies for which payment could be obtained in
whole or in part if an OMAP Member had applied for payment under any city,
county, state or federal law (except for Medicaid coverage);
- care for military service-connected disabilities for
which the OMAP Member is legally entitled to services and for which facilities
are reasonably available to the enrollee.
- services or supplies for which no charge is made, or for
which no charge is normally made in the absence of coverage.
(h) Services for alcoholism, drug abuse and addiction are not
provided.
(i) Mental health services including any treatment for insanity,
mental illness or disorder, or drug abuse induced mental condition are not
provided. This exclusion includes related somatic medical services and
prescription drugs.
(j) Pain clinics or specialty pain programs.
(k) Vocational counseling.
(l) Services or materials in an institution for the mentally
retarded except while a bed patient in an acute care hospital for conditions
other than mental retardation.
(m) Massage or massage therapy.
(n) Any infertility treatment or reversal of sterilization
procedures.
(o) Services or supplies related to transsexualism, sex
transformations, or paraphilias (sexual deviations), also mental,
psychological, or physical evaluations for any of these disorders.
(p) Biofeedback for any condition.
(q) Private duty nursing (except when medically necessary
as prescribed by a participating professional provider); personal comfort items
such as television, telephone and guest meals while in a hospital if charged
separately from the cost of the room.
(r) Diet or rest cure hospitalization, custodial care, personal
hygiene and other forms of supervised self-care.
(s) Services performed for cosmetic purposes including certain
reconstructive procedures unless performed for correction of functional
disorders, disease or as a result of an injury (subject to criteria
established by Contractor). Breast augmentation, and nasal rhinoplasty are not
covered procedures.
(t) Services and supplies provided for obesity or weight reduction.
Specifically excluded are; gastric stapling procedures, weight
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loss programs, counseling, hypnosis, biofeedback, neurolinguistic programming,
guided imagery and other forms of relaxation training as well as subliminal
suggestion used to modify eating behavior.
(u) All dental or orthodontic services and supplies (except for
fractured jaw) with the further exclusion of all hospitalization and related
charges when hospitalization is necessary to perform dental services, except as
provided under a separate dental PCO arrangement.
(v) Orthognathic surgery including maxillary or mandibular
osteotomies, dental care, and TMJ medical, dental, or surgical management.
Exception: the provision of prosthetics to repair head and facial structures
damaged by trauma, disease, surgery or congenital deformity that cannot be
managed with living tissue.
(w) Routine eye exams, (except for EPSDT screenings,) for OMAP
Members age twenty (20) or older, to determine need for vision correction. In
addition, benefits will not be provided for the following:
- the fitting, provision or replacement of eyeglasses, or
contact lenses;
- any charges for orthoptics, vitamin therapy, low vision
therapy or eye exercises or fundus photography; and
- routine contact lens checks.
(x) Surgical procedures which alter the refractive character of
the eye, including, but not limited to, radial keratotomy, myopic
keratomileusis and other surgical procedures of the refractive keratoplasty
type, the purpose of which is to cure or reduce -myopia or astigmatism.
Additionally, reversals or revisions of surgical procedures which after the
refractive character of the eye are excluded.
(y) Routine physical examinations primarily for coverage, licensing,
employment; and non-preventive purposes or other medical examinations or tests
not connected with the care and treatment of an actual illness or injury
(unless provided for under the prevention benefits of this contract). School
physicals occurring more often than the scheduled preventive benefits are also
excluded.
(z) Immunizations for the primary purpose of travel.
(aa) Appliances or equipment primarily for comfort, convenience,
cosmetics, environmental control or education, such as air conditioners,
humidifiers, air filters, whirlpools, heat lamps or tanning lights.
(ab) Any charges for medical records necessary to determine benefits.
- 63 -
<PAGE>
EXHIBIT B1
BENEFITS MATRIX
DIVISION OF FINANCIAL RESPONSIBILITY
PACIFICARE COMMERCIAL HEALTH PLAN
(To be included by PacifiCare)
- 64 -
<PAGE>
EXHIBIT B2
BENEFITS MATRIX
DIVISION OF FINANCIAL RESPONSIBILITY
SECURE HORIZONS HEALTH PLAN
(To be included by PacifiCare)
- 65 -
<PAGE>
EXHIBIT B3
BENEFITS MATRIX
DIVISION OF FINANCIAL RESPONSIBILITY
PACIFICARE MEDICAID PLAN
(To be included by PacifiCare)
- 66 -
<PAGE>
EXHIBIT C1
CAPITATION PAYMENTS
PACIFICARE COMMERCIAL HEALTH PLAN
MONTHLY CAPITATION PAYMENTS
PacifiCare shall pay to Medical Group, as full payment for all Covered
Medical Services provided to each Commercial Member who has selected or been
assigned to Medical Group as his or her Primary Care Physician, a monthly
Capitation Payment equal to the following:
$42.00 pmpm based on January 1996 demographics and plan design. The
capitation rate will fluctuate with age, sex and copy adjustments.
The Capitation Payment covers the Medical Services listed in Section II of
Exhibit A1.
MATERNITY PAYMENTS
For term pregnancies within nine (9) months after initial PacifiCare
membership, PacifiCare shall make a one-time lump sum payment to Medical Group
of $850. Medical Group shall be responsible to notify PacifiCare. Payment
will be made following delivery.
- 67 -
<PAGE>
EXHIBIT C2
CAPITATION PAYMENTS
SECURE HORIZONS HEALTH PLAN
MONTHLY CAPITATION PAYMENTS
PacifiCare shall pay to Medical Group, as full payment for all Covered
Services provided to each Secure Horizons Member who has selected or been
assigned to Medical Group as his or her Primary Care Physician, a monthly
Capitation Payment equal to the following:
39.32 % of the total Secure Horizons Revenue
The Capitation Payment covers the Medical Services listed in Section II of
Exhibit A2.
- 68 -
<PAGE>
EXHIBIT C3
CAPITATION PAYMENTS
PACIFICARE MEDICAID PLAN
I. MONTHLY CAPITATION PAYMENTS
PacifiCare shall pay to Medical Group, as full payment for all Covered
Services provided to each OMAP Member who has selected or been assigned to
Medical Group as his or her Primary Care Physician, a monthly Capitation Payment
equal to the following:
<TABLE>
<CAPTION>
OHP PLM Adults PLM Child
LESS THAN
100% 100-133% 100-133% AB/AD w/ AB/AD w/o OAA w/ OAA w/o CSD
FPL FPL FPL GA Medicare Medicare Medicare Medicare Children
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$74.22 $514.24 $94.06 $194.24 $76.70 $355.12 $61.99 $240.76 $80.14
</TABLE>
The Capitation Payment covers the Medical Services listed in Section II of
Exhibit A3.
II. MATERNITY WITHHOLD
PacifiCare shall reconcile the Maternity Withhold distribution on an annual
basis, aggregating all experience and distributions received for the
OHP contract year, October 1 through September 30. The reconcilliation
and distribution shall be done within sixty (60) days following the receipt of
any distribution, and documentation from the State of Oregon. PacifiCare will
follow the State methodology in distributing any monies received by
PacifiCare.
- 69 -
<PAGE>
EXHIBIT D1
INDIVIDUAL STOP-LOSS PROGRAM
PACIFICARE COMMERCIAL HEALTH PLAN
Medical Group does not participate in Individual Stop-Loss Program.
- 70 -
<PAGE>
EXHIBIT D2
INDIVIDUAL STOP-LOSS PROGRAM
SECURE HORIZONS HEALTH PLAN
Medical Group does not participate in Individual Stop-Loss Program.
- 71 -
<PAGE>
EXHIBIT D3
INDIVIDUAL STOP-LOSS PROGRAM
PACIFICARE MEDICAID PLAN
Medical Group does not participate in Individual Stop-Loss Program.
- 72 -
<PAGE>
EXHIBIT E1
HOSPITAL CONTROL PROGRAM
PACIFICARE COMMERCIAL HEALTH PLAN
1. INTRODUCTION
The Hospital Control Program (HCP) is designed to provide a financial incentive
for the control of inpatient, in-area emergency services and selected other
outpatient services. When actual incurred costs compared to a predetermined
budget are favorable, the savings will be shared with Medical Group. Conversely,
when actual incurred costs exceed the budget, the Medical Group also shares the
additional costs. Limitations are included at both the individual Member level
(through the payment of a reinsurance premium for specific Stop-Loss) and at the
aggregate level (through a percentage limitation on overall shared savings or
losses) to mitigate extraordinary performance fluctuations.
2. BUDGET TERM
For the period January 1, 1996, through December 31, 1996. If adjustments to
the hospital control budget under negotiation cannot be agreed to by the parties
by the renewal date, this Agreement may be terminated pursuant to Section 7.1.
Retroactive changes shall be allowed, if mutually agreed upon in writing by
the parties.
HOSPITAL BUDGET: $32.00 pmpm
3. ACTUAL COSTS
Actual costs are defined for purposes of this program as charges for those
services included in the Hospital Control Program incurred during the contract
period that are:
a. Paid, at net, by PacifiCare
b. Received and unpaid as of the run date of the HCP settlement
calculation at gross amount billed.
LESS
c. Prior years' claims and recoveries associated with authorized
services will be carried forward each year on the basis that
claims will not exceed recoveries by more than the lesser of
point five percent (.5%) pmpm of the total hospital control
budget or four thousand dollars ($4,000).
d. An estimated amount to account for discounts and Copayments expected
to be received on the unpaid claims included as actual costs.
4. CALCULATIONS OF SAVINGS AND LOSSES
If actual costs are less than the earned budget, then Medical Group will be paid
according to the attached schedule.
An interim calculation of the HCP results will be made by PacifiCare for each
quarter based on estimated incurred costs. The calculations will be computed
- 73 -
<PAGE>
on a contract year-to-date basis. The results will be reported to the Medical
Group within sixty (60) days of the end of each quarter. If there are deficits
in the HCP, the Medical Group will be required to make a payment to PacifiCare
in the amount the calculation indicates.
Medical Group shall submit all requests to reconcile the quarterly risk
settlement no later than sixty (60) days after receipt of each quarterly risk
settlement report. PacifiCare shall respond to reconciliation requests
within sixty (60) days of receipt of request. No later than August 31 after
the end of the prior year can the Medical Group submit request for claims
readjudication under risk settlement for the prior year.
Final payment will be made within one hundred and fifty (150) days of the end of
the contract period.
5. SPECIAL CONDITIONS FOR EMERGENCY SERVICES
If the Medical Group directs a Member to use the emergency services of a
hospital, and PacifiCare determines that direction was inappropriate, PacifiCare
may issue a written Conformance Request to Medical Group. The Conformance
Request will serve as notice that all subsequent inappropriate referrals may
have a penalty applied. If Medical Group thereafter makes an inappropriate
referral for emergency services of a hospital, PacifiCare may deduct the
professional component of the PacifiCare payment from Medical Group's capitation
as a penalty for improper referral. Medical Group may request review of any
determination by PacifiCare pursuant to this Paragraph by the Quality Assurance
Committee.
6. UNAUTHORIZED ADMISSIONS
Calculations shall not include unauthorized admissions whereby a patient is
admitted by a nonparticipating or nonreferring physician in a nonemergency
status or out-of-area hospitalization.
- 74 -
<PAGE>
EXHIBIT E1 (Continued)
HOSPITAL CONTROL PROGRAM - SCHEDULE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ase Medical Premium $85.81 $85.81 $85.81 $85.81 $85.81 $85.81 $85.81 $85.81 $85.81
hysician Cap [1] $42.00 $42.00 $42.00 $42.00 $42.00 $42.00 $42.00 $42.00 $42.00
ospital Budget [2] $32.00 $32.00 $32.00 $32.00 $32.00 $32.00 $32.00 $32.00 $32.00
ctual Costs $24.00 $25.00 $26.00 $27.00 $28.00 $29.00 $30.00 $31.00 $32.00
avings $ 8.00 $ 7.00 $ 6.00 $ 5.00 $ 4.00 $ 3.00 $ 2.00 $ 1.00 $ 0.00
acifiCare $ 2.00 $ 2.00 $ 2.00 $ 1.00 $ 1.00 $ 0.00 ($.72) ($.72) ($.72)
orvallis Clinic [3] $ 6.00 $ 5.00 $ 4.00 $ 4.00 $ 3.00 $ 3.00 $ 2.72 $ 1.72 $0.72
otal to Delivery Sys. $72.00 $72.00 $72.00 $73.00 $73.00 $74.00 $74.72 $74.72 $74.72
ut of Area Costs $ 1.65 $ 1.65 $ 1.65 $ 1.65 $ 1.65 $ 1.65 $ 1.65 $ 1.65 $ 1.65
otal Health Care Costs $73.65 $73.65 $73.65 $74.65 $74.65 $75.65 $76.37 $56.37 $76.37
acifiCare MLR 85.8% 85.8% 85.8% 87.0% 87.0% 88.2% 89.0% 89.0% 89.0%
otal to HealthQuest $48.00 $47.00 $46.00 $46.00 $45.00 $45.00 $44.72 $43.72 $42.72
</TABLE>
Assumptions:
[1] $42 pmpm is based on January 1996 age/sex and copy adjustments and will
fluctuate accordingly.
[2] Fixed pmpm. The Clinic will not purchase reinsurance from PacifiCare.
[3] Hospital Costs beyond $32 pmpm are at PacifiCare's risk.
Corv Platfm3/96 - 75 - 6/14/96
<PAGE>
EXHIBIT E2
HOSPITAL CONTROL PROGRAM
SECURE HORIZONS HEALTH PLAN
1. INTRODUCTION
The Hospital Control Program (HCP) is designed to provide a financial incentive
for the control of inpatient, in-area emergency services and selected other
outpatient services. When actual incurred costs compared to a predetermined
budget are favorable, the savings will be shared with Medical Group. Conversely,
when actual incurred costs exceed the budget, the Medical Group also shares the
additional costs. Limitations are included at both the individual Member level
(through the payment of a reinsurance premium for specific Stop-Loss) and at the
aggregate level (through a percentage limitation on overall shared savings or
losses) to mitigate extraordinary performance fluctuations.
2. BUDGET TERM
For the period January 1, 1996, through December 31, 1996. If adjustments
to the hospital control budget under negotiation cannot be agreed to by the
parties by the renewal date, this Agreement may be terminated pursuant to
Section 7.1. Retroactive changes shall be allowed if mutually agreed upon in
writing by the parties.
HOSPITAL BUDGET: 41.84% of total premium
3. ACTUAL COSTS
Actual costs are defined for purposes of this program as charges for those
services included in the Hospital Control Program incurred during the
contract period that are:
a. Paid, at net, by PacifiCare
b. Received and unpaid as of the run date of the HCP settlement
calculation at gross amount billed.
LESS
c. Prior years' claims and recoveries associated with authorized services
will be carried forward each year on the basis that claims will not
exceed recoveries by more than the lesser of point five percent (.5%)
pmpm of the total hospital control budget or four thousand dollars
($4,000).
d. An estimated amount to account for discounts and Copayments expected to
be received on the unpaid claims included as actual costs.
4. CALCULATION OF SAVINGS AND LOSSES
If actual costs are less than the earned budget, then Medical Group will be paid
fifty percent (50%) of the amount saved.
If actual costs are greater than the earned budget, then Medical Group will be
liable for fifty percent (50%) of the deficit.
An interim calculation of the HCP results will be made by PacifiCare for each
quarter based on estimated incurred costs. The calculations will be computed on
a contract year-to-date basis. The results will be reported to the Medical
- 76 -
<PAGE>
Group within sixty (60) days of the end of each quarter. If there are deficits
in the HCP, the Medical Group will be required to make a payment to PacifiCare
in the amount the calculation indicates.
Medical Group shall submit all requests to reconcile the quarterly risk
settlement no later than sixty (60) days after receipt of each quarterly risk
settlement report. PacifiCare shall respond to reconciliation requests within
sixty (60) days of receipt of request. No later than August 31 after the end
of the prior year can the Medical Group submit request for claims
readjudication under risk settlement for the prior year.
Final payment will be made within one hundred and fifty (150) days of the end of
the contract period.
5. SPECIAL CONDITIONS FOR EMERGENCY SERVICES
If the Medical Group directs a Member to use the emergency services of a
hospital, and PacifiCare determines that direction was inappropriate,
PacifiCare may issue a written Conformance Request to Medical Group. The
Conformance Request will serve as notice that all subsequent inappropriate
referrals may have a penalty applied. If Medical Group thereafter makes an
inappropriate referral for emergency services of a hospital, PacifiCare may
deduct the professional component of the PacifiCare payment from Medical Group's
capitation as a penalty for improper referral. Medical Group may request review
of any determination by PacifiCare pursuant to this Paragraph by the Quality
Assurance Committee.
6. UNAUTHORIZRD ADMISSIONS
Calculations shall not include unauthorized admissions whereby a patient is
admitted by a nonparticipating or nonreferring physician in a nonemergency
status or out-of-area hospitalization.
- 77 -
<PAGE>
EXHIBIT F1
PRESCRIPTION SERVICES PROGRAM
PACIFICARE COMMERCIAL HEALTH PLAN
The purpose of the Pharmacy Control Program is to provide an incentive to the
Medical Group to foster efficient utilization of prescription services. If
pharmacy costs for a calendar year are below the Medical Group's budget, the
Medical Group has the opportunity to share in the savings. In the event that
the pharmacy costs exceed the Medical Group's budget, the Medical Group will
share in the deficit.
PHARMACY CONTROL PROGRAM BUDGET
The Pharmacy Control Program budget shall equal eighty-two percent (82%) of the
outpatient prescription drug benefit supplemental premium per member assigned to
the group per month.
ACTUAL COSTS
The Actual Costs will be the actual expenses paid by PacifiCare for pharmacy
services of those members assigned to the Medical Group for the applicable
month.
BUDGET SURPLUS
In the event that Actual Costs are less than the Pharmacy Control Program
Budget, the amount will be referred to as a Budget Surplus. If Actual Costs are
up to $1 less than the Budget, PacifiCare shall pay the Medical Group 100% of
the savings, up to $1 pmpm. In the event that Actual Costs are more than $1
below the Budget, PacifiCare shall pay the Medical Group $1 pmpm (for the first
dollar under budget) and 50% of the Budget Surplus beyond the first dollar.
BUDGET DEFICIT
In the event that Actual Costs exceed the Budget during the calendar year, the
amount of this excess will be referred to as a Budget Deficit. If Actual Costs
are up to $1 over the Budget, Medical Group shall pay PacifiCare 100% of the
amount of the deficit, up to $1 pmpm. In the event that Actual Costs are more
than $1 over the Budget, the Medical Group shall pay PacifiCare $1 pmpm (for the
first dollar over budget) and 50% of the Budget Deficit beyond the first dollar.
UTILIZATION REPORTS
PacifiCare shall provide quarterly utilization reports to Medical Groups. Total
pharmacy expenditures for the Pharmacy Control Program will be calculated and
reported on an annual basis only.
PHARMACY CONTROL PROGRAM CALCULATIONS
The annual Pharmacy Control Program calculations shall be completed within one
hundred twenty (120) days of year end. If Medical Group is entitled to a payout,
PacifiCare shall make payment within one hundred twenty days of year end. If
PacifiCare is entitled to a payout by the Medical Group, the Medical Group
agrees to make payment to PacifiCare within sixty (60) days of receipt of the
Pharmacy Control Program Calculations. If Medical Group fails to make payment to
PacifiCare within sixty days, PacifiCare reserves the right to withhold owed
amount from future capitation payments.
- 78 -
<PAGE>
EXHIBIT F2
PRESCRIPTION SERVICES PROGRAM
PACIFICARE MEDICAID PLAN
The purpose of the Pharmacy Control Program is to provide an incentive to the
Medical Group to foster efficient utilization of prescription services. If
pharmacy costs for a calendar year are below the Medical Group's budget, the
Medical Group has the opportunity to share in the savings.
PHARMACY CONTROL PROGRAM BUDGET
The Pharmacy Control Program budget shall equal:
<TABLE>
<CAPTION>
OHP PLM Adults PLM Child
LESS THAN100% 100-133% 100-133% AB/AD w/ AB/AD w/o OOA w/ OAA w/o CSD
FPL FPL FPL GA Medicare Medicare Medicare Medicare Children
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rx Line
Budget $10.97 $15.25 $6.05 $16.23 $76.19 $160.12 $78.97 $76.97 $11.14
</TABLE>
ACTUAL COSTS
The Actual Costs will be the actual expenses paid by PacifiCare for pharmacy
services of those members assigned to the Medical Group for the applicable
month.
BUDGET SURPLUS AND DEFICIT
If Actual Costs are less than the Total Budget, PacifiCare shall pay the Medical
Group 50% of the savings.
Medical Group is not responsible for deficits in the Pharmacy Control Budget.
UTILIZATION REPORTS
PacifiCare shall provide quarterly utilization reports to Medical Groups. Total
pharmacy expenditures for the Pharmacy Control Program will be calculated and
reported on an annual basis only.
PHARMACY CONTROL PROGRAM CALCULATIONS
The annual Pharmacy Control Program calculations shall be completed within one
hundred twenty (120) days of year end. If Medical Group is entitled to a
payout, PacifiCare shall make payment within one hundred twenty days of year
end. If PacifiCare is entitled to a payout by the Medical Group, the Medical
Group agrees to make payment to PacifiCare within sixty (60) days of receipt of
the Pharmacy Control Program Calculations. If Medical Group fails to make
payment to PacifiCare within sixty days, PacifiCare reserves the right to
withhold owed amount from future capitation payments.
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<PAGE>
EXHIBIT G1
CAPITATED PAYMENTS
PACIFICARE POINT-OF-SERVICE PLAN
1. DEFINITIONS - The following definitions shall apply to the PacifiCare
Point-of-Service Plan:
1.1 COMMERCIAL PLAN - is the PacifiCare Commercial Health Plan which does
not provide coverage for Out-Of-Network Services.
1.2 IN-NETWORK SERVICES - are Covered Services which are (a) provided or
arranged by Medical Group pursuant to the PacifiCare Commercial Plan, (b)
received from a Non-Participating Provider following the direction, written
referral or prior authorization from a Participating Medical Group or a Medical
Group Physician, or (c) Emergency Services.
1.3 OPTION MEMBERS - are Members who are enrolled in the PacifiCare
Point-of-Service Plan and assigned to Medical Group.
1.4 OUT-OF-NETWORK SERVICES - Are Covered Services, excluding Emergency
Services, which are sought and received by Option Members without the direction,
advice, written referral or prior authorization from their Participating
Medical Group or a Medical Group Physician. Out-of-Network Services are covered
under the PacifiCare Point-of-Service Plan at a lower benefit level.
1.5 POINT-OF-SERVICE (POS) PLAN (OR "OPTION PLAN") - is the PacifiCare
Commercial Plan under which Members are entitled to coverage for both
In-Network and Out-of-Network Services. An Option Member selects a Primary Care
Physician at the time of enrollment and receives a higher level of benefits for
In-Network Services directed and authorized by the Member's Primary Care
Physician and a lower level of coverage for Out-of-Network Services.
2. TERMS OF PACIFICARE COMMERCIAL PLAN - Except as otherwise indicated in
this Exhibit H, all terms and conditions applicable to the PacifiCare
Commercial Plan apply to the Point-of-Service Plan.
3. COVERED SERVICES - Medical Group agrees to provide, arrange and direct
Covered Services for Option Members under the same terms and conditions as the
Commercial Plan and in the same manner as for Commercial Members, without
regard to the option of Out-of-Network Services.
4. ELIGIBILITY LIST - PacifiCare agrees to provide Medical Group with an
Eligibility List for the Option Members separate from the Eligibility List
furnished by PacifiCare for Commercial Members enrolled in the Commercial Plan.
Each Option Member will also receive a separate Member identification card
distinct from the Member identification care provided to Commercial Members.
Services provided to Members who convert from the Commercial Plan to the
Point-of-Service Plan, but which are not yet reflected on the Eligibility List,
may be billed to PacifiCare as if they are covered, if accompanied by a signed
Eligibility Guarantee form.
5. ADMINISTRATIVE PROCEDURES FOR POINT-OF-SERVICE PLAN - Medical Group shall
cooperate in arranging access to Out-of-Network Services in accordance with any
and all policies and procedures established by PacifiCare specifically for the
Point-of-Service Plan, as set forth separately in the Provider Manual, including
but not limited to, procedures for the submission of claims, authorizations,
subrogation and third party liability.
- 80 -
<PAGE>
6. COMPENSATION
A. FEE FOR SERVICE
1. COMPENSATION - Medical Group's compensation under the PacifiCare
Point-of-Service Plan and indemnity look alike portion includes the following
RBRVS factors:
E & M OTHER
$47.16 $53.60
Medical Group agrees to cooperate in arranging access to Non-Participating
Providers at Medical Group's contracted rates where PacifiCare finds that
arrangement advantageous.
2. THIRD PARTY LIABILITY - Medical Group further agrees to provide
PacifiCare with any Member patient information required to subrogate the claim
where the possibility of dual coverage or liability may exist.
3. OPTION PLAN UTILIZATION CONTROL PROGRAM
3.1 INTRODUCTION - The Option Plan Utilization Control
Program is designed to promote the financial incentive for control of
Out-of-Network Services. When actual incurred costs compared to a pre-determined
budget are favorable, the savings will be shared with Medical Group. If actual
costs are less than the earned budget, then Medical Group shall be paid fifty
percent (50%) of the amount saved up to ten percent (10%) of the total budget.
There is no down-side risk sharing program.
3.2 BUDGET AND BUDGET TERM - The budget listed below is in
effect from January 1, 1996 through December 31, 1996:
$93.67
Note: If membership in Option plan for Medical Group exceeds 250 members,
PacifiCare and Medical Group will renegotiate Budget and Term.
3.3 ACTUAL COSTS - Actual costs are defined for purposes of
the Point-of-Service Utilization Control Program as those services included in
the Utilization Management Budget (UMB) incurred that are:
(a) Paid, at net, by PacifiCare;
(b) Received and unpaid as of the run date of the UMB
settlement calculation at gross amount billed; and
(c) Medical Group authorized services from the immediate
prior calendar year which, due to their authorization by Medical Group more than
ninety (90) days after the end of the calendar year, will be carried forward
into the next year's cost calculations.
LESS
(d) Member costs in excess of the amount stated in
Section 8.2 above;
(e) Prior years' claims and recoveries associated with
authorized services will be carried forward each year on the basis that claims
will not exceed recoveries by more than the lesser of point five percent (.05%)
pmpm of the total hospital control budget or four thousand dollars ($4,000); and
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<PAGE>
(f) An estimated amount to account for discounts and
Copayments expected to be received on the unpaid claims included as actual
costs.
3.4 CALCULATION - An interim calculation of the UMB results
will be made by PacifiCare for each quarter based on estimated incurred costs.
The calculations will be computed on a contract year-to-year basis. The results
will be reported to Medical Group within sixty (60) days of the end of each
quarter.
3.5 MONTHLY REPORTING - PacifiCare will distribute a report
monthly, on or before the fifteenth (15th) day of each month, that lists the
payments made during the previous month for services included in the UMB.
3.6 THIRD PARTY LIABILITY - Prior years' actual claims and
recoveries associated with hospital or Emergency Services expenses that are
considered third-party liability, workers' compensation, etc. will be carried
forward each year. Third-party liability claims and recoveries will be included
in the aggregate of all claims and recoveries, whereas the aggregate claims
cannot exceed recoveries by more than the lesser of point five percent (.05%)
of pmpm of the total Hospital Control Budget or four thousand dollars ($4,000).
B. CAPITATED POINT OF SERVICE
Medical Group agrees that the financial arrangement under Section B of this
Exhibit H will replace the financial arrangement under Section I of this Exhibit
H following thirty (30) days notice of this decision to Medical Group by
PacifiCare.
Capitation payment for PacifiCare Point of Service plan subscribers will be
determined in the same manner as for Commercial plan subscribers, as described
in Exhibit C1, except for the following:
MONTHLY CAPITATION PAYMENTS
PacifiCare shall pay to Medical Group, as full payment for all Covered
Services provided to each Point of Service Member who has selected or been
assigned to Medical Group as his or her Primary Care Physician, a monthly
Capitation Payment equal to the following:
65% of the Percent of Premium specified in Exhibit C1, less 65% of the ISL
Premium rate specified for the ISL program as noted in Exhibit D1.
The actual amount of the Capitation Payment payable to Medical Group will
vary according to the mix of Medical Group Members under age, sex and Copayment
plan categories. The Capitation Payment covers the Hospital Services
listed in Section I of Exhibit A1 and the Medical Services listed in Section II
of Exhibit A1. Prior to distribution of the Capitation Payment, PacifiCare
shall deduct the premium for the Individual-Stop Loss program as specified in
Exhibit D1. The Capitation Payment also includes payment of the Hospital
Control Utilization Budget.
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<PAGE>
MATERNITY PAYMENTS
For term pregnancies within nine (9) months after initial PacifiCare
membership, PacifiCare shall make a one-time lump sum payment to Medical Group
of $850. Medical Group shall be responsible to notify PacifiCare. Payment will
be made following delivery.
- 83 -
<PAGE>
EXHIBIT G2
HOSPITAL CONTROL PROGRAM
PACIFICARE POINT OF SERVICE PLAN
1. INTRODUCTION
The PacifiCare Point of Service Control Program is designed to provide a
financial incentive for the control of In-Network Hospital Services and
Out-of-Network Services.
PacifiCare Point of Service Subscriber member months and related In-Network
Hospital Service expenses shall not be included in calculating the Commercial
Utilization Control Program described in Exhibit E1.
2. BUDGET
Point of Service Budget shall be equal to the Commercial HUCP budget as
described in Exhibit E1 plus the thirty-five percent (35%) withhold from the
Point of Service Capitation, as described in Exhibit H1, less sixty-five
percent (65%) of the reinsurance premium specified in Exhibit E1.
3. ACTUAL COSTS applied against the Point of Service Budget will consist of:
a. In-Network Hospital Services costs incurred during the period of
calculation for which PacifiCare has received a claim and paid net of discounts;
In-Network Hospital Services incurred prior to the period of calculation and
paid during the current period; and for quarterly interim calculations,
In-Network Hospital Services incurred during the period for which PacifiCare has
received a claim but has not paid, less an average aggregate discount factor
(for year end calculations, only paid claims will be included); LESS Subscriber
claim costs in excess of the In-Network Hospital Services reinsurance deductible
specified above;
b. Claims paid charges for Out-of-Network Services incurred during the
current period; and paid claim charges for Out-of-Network Services incurred but
not included in prior period Point of Service Control Program calculations; LESS
c. Third party liability and coordination of benefit recoveries for
In-Network and Out-of-Network Services that are received during the period of
calculation.
4. SAVINGS DISTRIBUTION - In the event that total charges are less than the
earned Point of Service Budget, Medical Group shall be entitled to participate
in a capitation restoration program, whereby Medical Group shall receive the
difference between actual capitation paid for PacifiCare Point of Service
Subscribers for the period and the amount Medical Group would have received had
Medical Groups capitation payments been based on one hundred percent (100%) of
the rates as defined in Exhibit C. Distribution to Medical Group under this
capitation restoration program shall be limited to the savings available
pursuant to the Point of Service Control Program calculation. Additionally,
Medical Group shall receive fifty percent (50%) of any remaining savings, if
any, after the Medical Group capitation restoration distribution.
Medical Group is not at financial risk in the event that total charges
exceed the earned Point of Service Budget.
- 84 -
<PAGE>
5. PERIODIC CALCULATIONS - the PacifiCare Point of Service Control Program
shall be administered on a Medical Group specific basis. For Medical Groups with
multiple facilities, the program shall be calculated for each facility, however
savings and payment distributions shall be based on Medical Groups consolidated
results.
Cumulative calculations of the PacifiCare Point of Service Control Program
results will be based on calendar quarters in conjunction with Commercial Plan
Hospital Control Program calculations, which are within sixty (60) days of the
end of each calendar quarter except for the first and forth quarters for which
no calculation or payment will be made in anticipation of the year end
settlement. Interim distribution payments will be limited to sixty percent
(60%) of calculated savings to account for incurred but not received claims.
Year end calculations and payments of the PacifiCare Point of Service Control
Program shall be made within one hundred eighty (180) days of the end of each
calendar year.
- 85 -
<PAGE>
EXHIBIT H
CREDENTIALING DELEGATION TABLE
NOT DELEGATED TO MEDICAL GROUPS
THE FOLLOWING TABLE DOES NOT APPLY
- 86 -
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
CR CR STANDARDS, NARRATIVE POTENTIALLY PCO COMMENTS
STANDARDS DELEGATED TO
APPROVED
PROVIDERS
- -----------------------------------------------------------------------------------------------------------------------------
PROGRAM DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.0 The managed care organization has X Delegated organization
written policies and procedures for the must include PCO's
credentialing process that include the P&Ps as an addendum to
original credentialing, recredentialing, their P&Ps
reclassification and/or reappointment of PCO must review the
physicians and other licensed delegated
independent practitioners who fall under organizations P&Ps to
its scope of authority and action. verify that PCO's
-Are there criteria that are applied to P&P's are included in
each applicant? an addendum, and then
-Are exceptions to criteria clearly review their
defined? credentialed
-Is there a stated time frame for /recredentialed files
recredentialing? to verify that they
-Is the recredentialing process clearly are complying with
described? PCO and NCQA
-Is there a stated process for reviewing, standards.
and revising P&Ps?
- -----------------------------------------------------------------------------------------------------------------------------
GOVERNANCE APPROVAL
- -----------------------------------------------------------------------------------------------------------------------------
2.0 The governing body, or the group or X Governance cannot be
individual to whom the governing body delegated. PCO's
has formally delegated the credentialing governing body must
function, reviews and approves the approve all PCO's
credentialing policies and procedures. credentialing
/recredentialing
policies and
procedures.
- -----------------------------------------------------------------------------------------------------------------------------
COMMITTEE APPROVAL
- -----------------------------------------------------------------------------------------------------------------------------
3.0 The managed care organization designates X PCO cannot delegate
a credentialing committee or other peer final approval of
review body that makes recommendations delegated credentialed
regarding credentialing decisions. or recredentialed
-Credentialing Policies and Procedures candidates. PCO
must reflect committee composition and Credentialing
meeting frequency. Committee will need to
-Committee minutes must reflect that the review and approve
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- 87 -
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
committee thoughtfully considers the lists from delegated
credentials of each applicant. credentialing entities
and give final
approval.
The delegated
organization must
notify PCO of any
newly credentialed or
recredentialed
providers, at least
monthly.
- -----------------------------------------------------------------------------------------------------------------------------
SCOPE OP AUTHORITY
- -----------------------------------------------------------------------------------------------------------------------------
4.0 The managed care organization identifies X
those practitioners who fall under its
scope of authority and action.
4.1 Included, at a minimum, are all
physicians and other licensed
independent practitioners listed in the
managed care organizations literature
for members.
- -----------------------------------------------------------------------------------------------------------------------------
CREDENTIALING PROCESS
- -----------------------------------------------------------------------------------------------------------------------------
5.0 The initial credentialing process is X Primary verification
ongoing and up-to-date. At a minimum, can be delegated. The
the delegated organization obtains and process must meet NCQA
reviews verification of the following standards and
from primary sources. document, at a
5.1 A current valid license to practice; minimum,
5.2 Clinical privileges in good standing identification of the
at the hospital designated by the source, date verified,
practitioner as the primary admitting and reviewers
facility, as applicable; initials.
5.3 A valid DEA or CDS certification, as
applicable;
5.4 Graduation from medical school and
completion of a residency, or board
certification, as applicable;
5.5 Work history;
5.6 Current, adequate malpractice
insurance according to the managed care
organization's policy; and
5.7 Professional liability claims
history.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 88 -
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6.0 The applicant completes an application X The application form
for membership. should include all of
6.1 The application includes a statement these points outlined
by the applicant regarding; in the standard. If a
6.1.1 reasons for any inability to copy of an application
perform the essential functions of the from an organization
positions, with or without external to PCO is
accommodation; used, the copy must
6.1.2 lack of present illegal drug use include an original
#; attestation and
6.1.3 history of loss of license and/or physician signature to
felony convictions; correctness and
6.1.4 history of loss or limitation of completeness of the
privileges or disciplinary activity. application.
6.2 There is an attestation to
correctness /completeness of the
application.
- -----------------------------------------------------------------------------------------------------------------------------
7.0 There is evidence that the delegated X PCO must review the
organization requests information on the delegates policy and
practitioner from recognized monitoring procedures on
organizations. obtaining information
7.1 The managed care organization has from appropriate
requested information from the National agencies. There must
Practitioner Data Bank. be evidence that the
7.2 The managed care organization has delegate's policy on
requested information from the State obtaining information
Board of Medical Examiners or Department has been followed.
of Professional Regulations (if
available).
7.3 The managed care organization has
reviewed for pervious sanction activity
by Medicare and Medicaid.
- -----------------------------------------------------------------------------------------------------------------------------
SITE VISIT
- -----------------------------------------------------------------------------------------------------------------------------
8.0 There is an initial visit to each X PCO must conduct site
potential primary care practitioner's visits on all PCPs and
office and to the offices of PCO high-volume
obstetricians/gynecologists and other delegates specialists.
high-volume specialists. this to the The site visit must
8.1 The visit results in documentation OMA/ARC occur within a one-
of a structured review of the site and Program year period prior to
of medical recordkeeping practices to the credentials
ensure conformance with the managed care committee's review and
organization's standards. recommendation.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 89 -
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Completed site visit
forms must be
maintained in PCO's
credentialing file.
There should be notes
in PCO's credentialing
file that describes
the results of the
visits.
PCO would not delegate
this to Medical Groups
or credentialing
agencies.
- -----------------------------------------------------------------------------------------------------------------------------
OTHER PROVIDERS
- -----------------------------------------------------------------------------------------------------------------------------
9.0 The managed care organization has X Prior to contracting,
written policies and procedures for the the managed care
initial quality assessment of health organization should
delivery organizations with which it verify that the
intends to contract. The managed care delivery organization
organization should confirm that the has met all state and
health delivery organization has been federal licensing and
reviewed and approved by a recognized regulatory
accrediting body, and is in good requirements.
standing with state and federal PCO should confirm
regulatory bodies. If the health that the health care
delivery organization has not been delivery organization
approved by a recognized accrediting has been approved by a
body, the managed care organization must recognized accrediting
develop and implement standards of body.
participation. Health delivery Verification from
organization include, but are not primary sources for
limited to: either licensure or
accreditation is not
CR9.1 Hospitals required.
CR9.2 Home Health Agencies
CR9.3 Nursing Homes
CR9.4 Free Standing Surgical Centers
- -----------------------------------------------------------------------------------------------------------------------------
RECREDENTIALING PROCESS
- -----------------------------------------------------------------------------------------------------------------------------
10.0 There is a process for the periodic X X Reverification of
verification of credentials primary verification
(recredentialing, reappointment, or credentials can be
recertification) that is ongoing and up- delegated. PCO must
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 90 -
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
to-date. verify that the
10.1 At a minimum, the recredentialing, delegates policies and
recertification or reappointment process procedures include
includes verification from primary PCO's P&Ps and an
sources of: attachment, and then
10.2.1 a valid state license to evaluate the extent to
practice; which the delegate
10.2.2 clinical privileges in good adheres to its
standing at the hospital designed by the policies and
practitioner as the primary admitting procedures in
facility; recredentialing
10.2.3 a valid DEA or CDS certificate, providers.
as applicable; PCO demonstrates
10.2.4 Board certification, as oversight of delegated
applicable; activities, and
10.2.5 current, adequate malpractice conducts for Provider
insurance according to the managed care Groups that are not
organization's policy; delegated.
10.2.6 professional liability claims
history.
10.3 The recredentialing process
includes a current statement by the
applicant regarding
10.3.1 physical and mental health
status;
10.3.2 lack of immurement due to
chemical dependency abuse.
- -----------------------------------------------------------------------------------------------------------------------------
11.0 There is evidence that the managed care X The delegate must
organization requests information from PCO does document primary
recognized monitoring organizations. oversight/ verification
11.1 The managed care organization has continuous including, at a
requested information from the National monitoring minimum,
Practitioner Data Bank. identification of the
11.2 The managed care organization has source, date verified,
requested information from the State and reviewers
Board of Medical Examiners or Department initials.
of Professional Regulations (if
available).
11.3 The managed care organization has
reviewed for previous sanction activity
by Medicare and Medicaid.
- -----------------------------------------------------------------------------------------------------------------------------
12.0 The recredentialing, recertification or X PCO's and it's
performance appraisal process also delegates must have
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 91 -
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
includes review of data from member recertification
complaints, results of quality reviews, policies and
utilization management, and member procedures
satisfaction surveys. Both PCO and it's
12.1 member complaints; delegates
12.2 results of quality reviews; recertification
12.3 utilization management; processes must
12.4 member satisfaction surveys incorporate
information from
various QI processes,
such as member
complaints, results of
QI studies, UM, and
member satisfaction
surveys.
Practitioners must be
recredentialed every
two years.
- -----------------------------------------------------------------------------------------------------------------------------
13.0 The recredentialing process includes an X PCO must conduct site
on-site visit to provider offices. PCO visits on all PCPs
13.1 The visit results in documenting of delegates and high-volume
a structured review of the site and of to the specialties.
medical recordkeeping practices to OM/ARC The site visit must be
ensure conformance with the managed care Program completed prior to
organization's standards. recredentialing.
13.2 The following offices should be There must be explicit
visited: standards for
13.2.1 all primary care providers criteria.
13.2.2 all obstetricians/gynecologists; Completed site visit
13.2.3 high-volume specialists forms must be
maintained in the
credentialing file.
There should be notes
in the credentialing
file that describes
the results of the
visits.
PCO would directly
work with the OMA ARC
program, but not to
provider groups or
other entities
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 92 -
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
DELEGATION
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
14.0 The managed care and delegated X PCO must have P&Ps to
organization has policies and procedures suspend or terminate
for the reducing, suspending, or providers when serious
terminating practitioner privileges. quality deficiencies
14.1 There is a mechanism for, and are identified.
evidence of implementation of procedures PCO must have an
for, reporting to appropriate appeal process for
authorities serious quality deficiencies practitioners whose
which could result in suspension or privileges have been
termination of a practitioner's reduced, suspended, or
participation. terminated.
14.2 There is an appeal process in There must be evidence
instances where the managed care that PCO identifies
organization reduces, suspends, or serious quality
terminates a practitioner's deficiencies, and
participation for reasons relating to takes appropriate
quality of care, competence, or action.
professional conduct. The managed care PCO must have a
organization makes known to the mechanism
practitioner the procedure by which to for
appeal an adverse determination. notifying any
practitioner and
their organization
that privileges have
been reduced,
suspended, or
terminated by the
appeal process.
- -----------------------------------------------------------------------------------------------------------------------------
15.0 If the managed care or delegated X Delegate's contract
organization delegates any credentialing provisions must
(and recredentialing, recertification, include PCO's
or reappointment) activates to credentialing and
contractors, there is evidence of recredentialing P&Ps
oversight of the contracted activity. PCO must monitor it's
15.1 There is written description of: delegates
15.1.1 the delegated activities; credentialing and
15.1.2 the delegate's accountability for recredentialing
these activities. processes at least
15.2 The managed care organization annually.
retains the right to approve new Delegate must have
providers and sites, and to terminate or process for notifying
suspend individual providers. PCO of provider
15.3 The managed care organization additions, deletions,
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 93 -
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
monitors the effectiveness of the or other
delegate's credentialing and status
reappointment or recertification changes.
processes at least annually. PCO must reserve the
right to
approve/disapprove
individual
practitioners and
sites.
PCO delegates must
coordinate PCO's QI
program and the
delegate's
recertification
process.
PCO staff must review
delegates
credentialing
committee minutes,
credentialing files,
verification
documentation and
incorporated
recredentialing
processes.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 94 -
<PAGE>
EXHIBIT I
DELEGATION OF QUALITY IMPROVEMENT
FOLLOWING THREE PAGES
- 95 -
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
QI QI STANDARDS, NARRATIVE DELEGATED TO PCO
STANDARDS PROVIDER GROUP
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1.0 PROGRAM STRUCTURE X
- -----------------------------------------------------------------------------------------------------------------------------
2.0 ACCOUNTABILITY TO THE GOVERNING BODY X
- -----------------------------------------------------------------------------------------------------------------------------
3.0 COORDINATION WITH OTHER MANAGEMENT ACTIVITY X
- -----------------------------------------------------------------------------------------------------------------------------
3.1 QI information is used in recredentialing, recontracting, and/or annual
performance evaluations:
Provider Groups X
PCO-contracted ancillary providers X
Provider Group contracted ancillary providers X
Provider Group contracted specialists X
- -----------------------------------------------------------------------------------------------------------------------------
3.2 QI activities are coordinated with other performance monitoring activities, X
including UM, RM, and resolution and monitoring of member complaints and
grievances.
- -----------------------------------------------------------------------------------------------------------------------------
3.3 There is a linkage between QI and other management functions of the managed care X
organization. Examples of such linkages include network changes, benefits
redesign, medical management systems, practice feedback to physicians, and
patient education.
- -----------------------------------------------------------------------------------------------------------------------------
4.0 PROVIDER CONTRACTS:
PCO-contracted Provider Groups X
PCO-contracted ancillary providers X
PCO-contracted hospitals and HDOs X
Provider Group contracted specialists X
Provider Group contracted ancillary providers X
- -----------------------------------------------------------------------------------------------------------------------------
5.0 SCOPE AND CONTENT X
- -----------------------------------------------------------------------------------------------------------------------------
6.0 IMPORTANT ASPECTS OF CARE AND SERVICE X
- -----------------------------------------------------------------------------------------------------------------------------
6.1 The monitoring and evaluation of important aspects of care and service includes X
high-volume services and high-risk services, and the care of acute and chronic
conditions.
- -----------------------------------------------------------------------------------------------------------------------------
6.2 The managed care organization is accountable for adopting and using practice X
guidelines or explicit criteria that are based on reasonable scientific evidence
and reviewed by managed care organization providers.
- -----------------------------------------------------------------------------------------------------------------------------
6.3 The managed care organization evaluates the continuity and coordination of care X
members receive.
- -----------------------------------------------------------------------------------------------------------------------------
6.4 The managed care organization has mechanisms to detect underutilization as well X
as overutilization.
- -----------------------------------------------------------------------------------------------------------------------------
7.0 ACCESS TO CARE AND SERVICE:
Access standards X
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 96 -
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Performance on these standards is assessed against these standards: X
- -----------------------------------------------------------------------------------------------------------------------------
8.0 HEALTH MANAGEMENT SYSTEMS X
- -----------------------------------------------------------------------------------------------------------------------------
9.0 MEASUREMENT AND IMPROVEMENT
- -----------------------------------------------------------------------------------------------------------------------------
9.1 Quality indicators that are objective, measurable, and based on current X
knowledge and clinical experience are used to monitor and evaluate each
important aspect of are and service identified.
- -----------------------------------------------------------------------------------------------------------------------------
9.1.1 The managed care organization has performance goals and/or a benchmarking X
process for each indicator.
- -----------------------------------------------------------------------------------------------------------------------------
9.2 Appropriate methods and frequency of data collection are used for each indicator X
- -----------------------------------------------------------------------------------------------------------------------------
9.2.1 QI activities include the collection of necessary data
- -----------------------------------------------------------------------------------------------------------------------------
9.3 Data collected through monitoring and evaluation activities are analyzed
- Collection and Submission X
- Oversight and Evaluation of Data Quality X
- -----------------------------------------------------------------------------------------------------------------------------
9.3.1 Appropriate clinicians are used to evaluate data on clinical performance of X
practitioners
- -----------------------------------------------------------------------------------------------------------------------------
9.3.2 Multidisciplinary teams are used, where indicated, to analyze and address X
systems issues.
- -----------------------------------------------------------------------------------------------------------------------------
10.0 ACTION AND FOLLOW-UP:
The managed care organization takes actions to improve quality and assess the
effectiveness of these actions through systematic follow-up. X
- -----------------------------------------------------------------------------------------------------------------------------
10.1 There is evidence that results of evaluations are used to improve clinical care X
and service.
- -----------------------------------------------------------------------------------------------------------------------------
10.2 There is a systematic method of tracking areas identified for improvement to X
assure that appropriate action is taken.
- -----------------------------------------------------------------------------------------------------------------------------
10.3 The managed care organization assures follow-up on identified issues to ensure X
that actions for improvement have been effective.
- -----------------------------------------------------------------------------------------------------------------------------
11.0 EFFECTIVENESS OF THE QI PROGRAM X
- -----------------------------------------------------------------------------------------------------------------------------
11.1 There is an annual written report on quality, including a report of completed QI
activities, trending of clinical and service indicators and other performance
data, and demonstrated improvements in quality. X
- -----------------------------------------------------------------------------------------------------------------------------
11.2 There is evidence that QI activities have contributed to improvement in the care X
and services provided members.
- -----------------------------------------------------------------------------------------------------------------------------
12.0 DELEGATION OF QI ACTIVITY: X
If the managed care organization delegates any QI activities to contractors,
there is evidence of oversight of the contracted activity.
(I suggest we use the NCQA Tool Matrix (page 45 of the tool book; attached) to
document and delegation to groups, especially if there are any exceptions to PCO
general standards.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 97 -
<PAGE>
EXHIBIT I
DELEGATION OF QUALITY IMPROVEMENT (Continued)
PACIFICARE OF OREGON MEDICAL RECORDS
DELEGATION TABLE BY NCQA STANDARD
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
MEDICAL RECORDS MEDICAL RECORDS POTENTENTIALLY PCO COMMENTS
STANDARDS STANDARDS, NARRATIVE DELEGATED
TO APPROVED
PROVIDERS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.0 Medical Records are X Oversight
maintained Responsibility
in a ; mechanics of
manner that is this oversight
current, detailed, is delegated
organized, and to the OMA/ARC
permits effective Program
patient care and
quality review
- ----------------------------------------------------------------------------------------------------
1.1 All records reflect X Oversight
all aspects of care delegated to
the OMA/ARC
Program
- ----------------------------------------------------------------------------------------------------
1.2 Records available to X Oversight
health practitioners delegated to
at each encounter the OMA/ARC
Program
- ----------------------------------------------------------------------------------------------------
2.0 Managed care set X Coalition
standards for Coalition of of HMO's
medical records; HMO's wrote provides
systematically and agreed to oversight
reviews records for standards; to the
conformance and mechanics of OMA/ARC
institutes this oversight Program
corrective action is delegated
when standards are to the OMA/ARC
not met Program
- ----------------------------------------------------------------------------------------------------
3.0 Documentation of X X
items demonstrates Oversight
medical records are delegated to
in conformity the OMA/ARC
Program
- ----------------------------------------------------------------------------------------------------
</TABLE>
Medical Records: Flow Sheet/Each Provider
1. Maintenance of clinical medical records.
2. Review of office space medical records for conformance with standards.
3. Documentation that medical records are in conformity with good medical
practice.
- 98 -
<PAGE>
EXHIBIT J
DELEGATION OF UTILIZATION MANAGEMENT
Next Two Pages
- 99 -
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
UM UM STANDARDS, NARRATIVE DELEGATED PCO UNCERTAIN COMMENTS
STANDARDS TO IF
PROVIDERS DELEGATED
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1.0 Managed care organization has documented X
Utilization Management (UM) program description
that describes both delegated and non-delegated
activities.
- ------------------------------------------------------------------------------------------------------------------------------------
2.0 Where procedures are used for pre-authorization X X See above.
and concurrent review, qualified medical
professional supervise and review decisions.
- ------------------------------------------------------------------------------------------------------------------------------------
3.0 There is a set of written UM review decision X The Plan gives direction to
protocols that are based on reasonable medical the groups that they use
evidence. MILLIMAN & ROBERTSON as
their Protocol.
- ------------------------------------------------------------------------------------------------------------------------------------
4.0 Efforts are made to obtain all necessary X X Timelines are mandated by
information, including printed clinical PCO with oversight.
information and consultation with treating
physician as appropriate.
- ------------------------------------------------------------------------------------------------------------------------------------
5.0 Decisions are made in a timely manner depending on X X PCO mandates appeals
the urgency of the situation. language.
- ------------------------------------------------------------------------------------------------------------------------------------
6.0 Reasons for denial include a document available to X X See 1.0.
member. Notification of a denial includes appeal
process.
- ------------------------------------------------------------------------------------------------------------------------------------
7.0 Managed Care Organization has policies and X The technology assessment
procedures in place to evaluate the appropriate process and Committee are
use of new medical technology or new applications not delegated and are held
of established technologies including medical at PacifiCare. The groups
procedures, drugs and devices. access PacifiCare's
decisions around new
technologies for coverage
determinations.
- ------------------------------------------------------------------------------------------------------------------------------------
8.0 There are mechanisms to evaluate effects of the X Currently PCO is beginning
program using member satisfaction data, provider to look at a broader
satisfaction and other appropriate means. spectrum review of the UM
issues. The groups do
address our UM issues
within their own systems
through data and/or
experiential information in
terms of over utilization
issues. None of the groups
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 100 -
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
UM UM STANDARDS, NARRATIVE DELEGATED PCO UNCERTAIN COMMENTS
STANDARDS TO IF
PROVIDERS DELEGATED
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
are accessing member
satisfaction or provider
satisfaction in their
issues, neither is
PacifiCare. That will be
something that we need to
look at.
- ------------------------------------------------------------------------------------------------------------------------------------
9.0 Managed care delegates any UM activities to X Applies to all above.
contractors if there is oversight of contracted
activity.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 101 -
<PAGE>
EXHIBIT K
DELEGATION OF CLAIMS PAYMENT
(In Development)
- 102 -
<PAGE>
EXHIBIT L
MEDICAL GROUP SERVICE AREA
SERVICE AREA DEFINITION
SERVICE AREA
Service area is the geographic area within Linn and Benton Counties.
Said radius commences with the address of Medical Group and extends for twenty
(20) miles over the shortest route using public streets and highways.
Medical Group's Service Area shall be established for Medical Group
main office, its operated satellite offices, and subcontracted primary care
provider locations.
- 103 -
<PAGE>
EXHIBIT M
ACCESS GUIDELINES
PACIFICARE OF OREGON
ACCESS GUIDELINES(1)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
TIMEFRAME FOR APPOINTMENT
ACCESS INDICATOR
-------------------------------------------------------------------------------------
<S> <C>
Emergency Immediate
-------------------------------------------------------------------------------------
Urgent Within 24 hours
-------------------------------------------------------------------------------------
Nonurgent (Symptomatic) 7 Calendar Days
-------------------------------------------------------------------------------------
Routine Health Assessment 30 Calendar Days
(Asymptomatic)
EXAMPLES OF ROUTINE VISITS:
PAP, IMMUNIZATIONS, WELL BABY
CHECK, BLOOD PRESSURE CHECK,
PO2 LEVELS, DIABETIC CHECK
-------------------------------------------------------------------------------------
History and Physical 42 Calendar Days
Examination
New Member Appointments
-------------------------------------------------------------------------------------
Specialty Urgent Referral Within 24 Hours
-------------------------------------------------------------------------------------
Specialty Nonurgent Referrals:
- Specialty asymptomatic 30 Calendar Days
routine health referral,
e.g., ophthalmology
- Specialty asymptomatic 21 Calendar Days
nonroutine health referral
(From time patient is
notified a referral will be
requested, until seen by
referral specialist)
- Specialty nonurgent 14 Calendar Days
symptomatic referral (From
time referral is authorized
by Patient Care Committee of
Provider, until member is
seen by Referral Specialist)
-------------------------------------------------------------------------------------
</TABLE>
(1) Access to care may vary based on the severity of the members presenting
symptoms. These access parameters are not intended to substitute for sound
clinical judgment based on an individual's needs.
- 104 -
<PAGE>
PACIFICARE OF OREGON/WASHINGTON
MEDICAL GROUP SERVICES AGREEMENT
1996 AMENDMENT
ALL CHANGES EFFECTIVE 1/1/96
The Medical Group Services Agreement ("Agreement") by and between PacifiCare,
Inc., and CORVALLIS CLINIC, entered into on January 1, 1996, is hereby amended
in the following particulars:
Section 5.5 is amended, Section 12.18 is added to the Agreement, and Exhibit
"F1" of the Agreement is amended as attached.
IN WITNESS WHEREOF, the parties agree to the foregoing amendments to
the Agreement as dated below.
PACIFICARE OF OREGON CORVALLIS CLINIC
By: /s/ John J. Wagner By: /s/ David L. Kobriger
------------------------------ ------------------------------
John J. Wagner
Contract Administrator Name: David L. Kobriger
--------------------------------
(please print)
Title: CEO
-------------------------------
Tax ID#:
Date: 8/2/96 Date: 8-6-96
------------------------------- --------------------------------
- 1 -
<PAGE>
5.5 CHANGES IN ACCEPTED TREATMENT - In the event that one or more
recognized changes in commonly accepted standards of treatment followed by the
preponderance of the medical profession result in the aggregate in an increase
in the cost of Covered Services, Medical Group and PacifiCare shall equally
share such increase in cost during the term of this Agreement and
any Continuing Care Period thereafter.
A significant increase in the cost of Covered Services shall be
considered to exist within the meaning of this Section if the cost of treatment
in accordance with appropriate treatment protocols increases by more than one-
half of one percent (.5%) of Medical Group's Capitation Payments in a calendar
year.
PacifiCare's Medical Director, in consultation with Medical Group and the
Quality Improvement Committee, shall initially determine whether a
recognized change in commonly accepted standards of treatment followed by the
preponderance of the medical profession has occurred and shall
determine treatment protocols to be followed by Medical Group. Medical
Group may request review of such determinations by PacifiCare pursuant to
Section 9.5 or arbitration pursuant to Section 9.7.
********
12.18 ADDITIONAL PROVISIONS APPLICABLE TO MEDICAL SERVICES CONTRACT - To
the extent this Agreement is deemed a Medical Services Contract as defined by
Oregon law, the following provisions shall apply in addition to all other
provisions of this Agreement:
12.18.01 NOTICE AND HEARING RIGHTS. If this Agreement is
terminated or not renewed based upon issues relating to the quality of patient
care rendered by Medical Group, Medical Group shall be entitled to the notice
and hearing rights afforded under PacifiCare's policies and procedures
regarding termination of provider groups for reasons relating to quality of
care.
12.18.02 ANNUAL ACCOUNTING. Upon Medical Group's request,
following the end of each calendar year during the term of this Agreement,
PacifiCare shall furnish Medical Group with an annual accounting accurately
summarizing the financial transactions between Medical Group and PacifiCare for
such calendar year.
12.18.03 WITHDRAWAL FROM CARE OF PATIENT. Medical Group may
withdraw from the care of a patient, when, in the professional judgment of
Medical Group, it is in the best interest of the patient to do so.
12.18.04 MEDICAL DIRECTOR. A doctor of medicine or osteopathy
licensed under ORS Chapter 677 shall be retained by PacifiCare as the
PacifiCare Medical Director and shall be responsible for all final medical and
mental health decisions relating to coverage or payment made by PacifiCare
pursuant to this Agreement.
- 2 -
<PAGE>
EXHIBIT F1
PRESCRIPTION SERVICES PROGRAM
PACIFICARE COMMERCIAL HEALTH PLAN
The purpose of the Pharmacy Control Program is to provide an incentive to the
Medical Group to foster efficient utilization of prescription services. If
pharmacy costs for a calendar year are below the Medical Group's budget, the
Medical Group has the opportunity to share in the savings.
PHARMACY CONTROL PROGRAM BUDGET
The Pharmacy Control Program budget shall equal nine dollars thirty cents
($9.30) per member assigned to the group per month.
ACTUAL COSTS
The Actual Costs will be the actual expenses paid by PacifiCare for pharmacy
services of those members assigned to the Medical Group for the applicable
month.
BUDGET SURPLUS
In the event that Actual Costs are less than the Pharmacy Control Program
Budget, the amount will be referred to as a Budget Surplus. If Actual Costs are
less than the Budget, PacifiCare shall pay the Medical Group seventy-five
percent (75%) of the savings. Medical Group is not responsible for Actual
Costs in excess of earned budget.
UTILIZATION REPORTS
PacifiCare shall provide quarterly utilization reports to Medical Groups.
Total pharmacy expenditures for the Pharmacy Control Program will be
calculated and reported on an annual basis only.
PHARMACY CONTROL PROGRAM CALCULATIONS
The annual Pharmacy Control Program calculations shall be completed within one
hundred twenty (120) days of year end. If Medical Group is entitled to a
payout, PacifiCare shall make payment within one hundred twenty days of year
end.
- 3 -
<PAGE>
PACIFICARE OF OREGON/WASHINGTON
MEDICAL GROUP SERVICES AGREEMENT
1996 AMENDMENT
ALL CHANGES EFFECTIVE 1/1/96
The Medical Group Services Agreement ("Agreement") by and between PacifiCare,
Inc., and CORVALLIS CLINIC, entered into on January 1, 1996, is hereby amended
in the following particulars:
Exhibit E1 - Hospital Control Program - PacifiCare Commercial Health Plan - of
the Agreement, is amended by adding the highlighted paragraph as follows:
4. CALCULATION OF SAVINGS AND LOSSES
If actual costs are less than the earned budget, then Medical Group will be paid
according to the attached schedule.
Interim settlements on the Hospital Control Program shall be made on a quarterly
basis commencing with the second quarter. Payment shall equal 75% of the amount
due to Medical Group. Payment is due within 60 days after the end of the
reporting period.
Medical Group shall submit all requests to reconcile the quarterly
risk settlement no later than sixty (60) days after receipt of each quarterly
risk settlement report. PacifiCare shall respond to reconciliation requests
within sixty (60) days of receipt of request. No later than August 31 after the
end of the prior year can the Medical Group submit request for claims
readjudication under risk settlement for the prior year.
Final payment will be made within one hundred and fifty (150) days of the end of
the contract period.
IN WITNESS WHEREOF, the parties agree to the foregoing amendments to
the Agreement as dated below.
PACIFICARE OF OREGON CORVALLIS CLINIC
By: /s/ John J. Wagner By: /s/ David L. Kobriger
----------------------------- -----------------------------
John J. Wagner
Contract Administrator Name: David L. Kobriger
------------------------------
(please print)
Title: Chief Executive Officer
-----------------------------
Tax ID#:93-0785777
Date: 9/5/96 Date: September 16, 1996
------------------------------ ------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
registration statement.
ARTHUR ANDERSON LLP
Portland, Oregon
November 1, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF APPRAISER
We hereby consent to the references made to us and/or our appraisal by
HealthFirst Medical Group, P.C., The Corvallis Clinic, P.C., Medford Clinic,
P.C. and Physician Partners, Inc. under the captions "Summary"; "The Merger and
Related Transactions -- Corvallis Reasons For Merger"; "Terms of the
Reorganization and Merger -- Effects of the Merger"; and "Experts"; in the Joint
Proxy Statement and Prospectus constituting a part of this Registration
Statement on Form S-4. In addition we consent to the review and copying of our
appraisal report referred to therein by any stockholder of the above named
companies. In giving such consent, we do not thereby admit that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
AMERICAN APPRAISAL ASSOCIATES, INC.
By /s/ JOSEPH P. ZVESPER
--------------------------------------
Joseph P. Zvesper
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Milwaukee, Wisconsin
November 5, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PHYSICIAN
PARTNERS, INC. FINANCIAL STATEMENTS AS OF JUNE 30, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 30
<OTHER-SE> 2,970
<TOTAL-LIABILITY-AND-EQUITY> 3,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 696,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (696,639)
<INCOME-TAX> 0
<INCOME-CONTINUING> (696,639)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (696,639)
<EPS-PRIMARY> (232.21)
<EPS-DILUTED> (232.21)
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
HEALTHFIRST FINANCIAL STATEMENTS AS OF JUNE 30, 1996, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,560,432
<SECURITIES> 0
<RECEIVABLES> 10,458,718
<ALLOWANCES> 2,035,855
<INVENTORY> 0
<CURRENT-ASSETS> 12,373,027
<PP&E> 24,695,609
<DEPRECIATION> 4,976,711
<TOTAL-ASSETS> 32,459,183
<CURRENT-LIABILITIES> 14,915,199
<BONDS> 8,630,435
0
0
<COMMON> 906,000
<OTHER-SE> 4,140,528
<TOTAL-LIABILITY-AND-EQUITY> 32,459,183
<SALES> 0
<TOTAL-REVENUES> 28,706,526
<CGS> 0
<TOTAL-COSTS> 12,426,409
<OTHER-EXPENSES> 19,516,184
<LOSS-PROVISION> 731,547
<INTEREST-EXPENSE> 428,780
<INCOME-PRETAX> (3,893,589)
<INCOME-TAX> (1,348,242)
<INCOME-CONTINUING> (2,545,347)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,545,347)
<EPS-PRIMARY> (372.94)
<EPS-DILUTED> (372.94)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CORVALLIS
CLINIC FINANCIAL STATEMENTS AS OF JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 71,492
<SECURITIES> 0
<RECEIVABLES> 8,547,896
<ALLOWANCES> 2,627,000
<INVENTORY> 184,172
<CURRENT-ASSETS> 6,324,765
<PP&E> 27,869,014
<DEPRECIATION> 8,426,329
<TOTAL-ASSETS> 26,727,499
<CURRENT-LIABILITIES> 8,093,141
<BONDS> 14,651,920
2,233,140
0
<COMMON> 4,842,713
<OTHER-SE> (4,463,544)
<TOTAL-LIABILITY-AND-EQUITY> 26,727,499
<SALES> 0
<TOTAL-REVENUES> 24,029,330
<CGS> 0
<TOTAL-COSTS> 17,687,242
<OTHER-EXPENSES> 16,714,927
<LOSS-PROVISION> 660,019
<INTEREST-EXPENSE> 687,329
<INCOME-PRETAX> (70,039)
<INCOME-TAX> 0
<INCOME-CONTINUING> (70,039)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (70,039)
<EPS-PRIMARY> (74.81)
<EPS-DILUTED> (74.81)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MEDFORD
CLINIC FINANCIAL STATEMENTS AS OF JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,085,535
<SECURITIES> 1,000,000
<RECEIVABLES> 10,458,749
<ALLOWANCES> 3,124,366
<INVENTORY> 258,424
<CURRENT-ASSETS> 9,988,542
<PP&E> 10,499,919
<DEPRECIATION> 4,835,084
<TOTAL-ASSETS> 15,954,685
<CURRENT-LIABILITIES> 7,601,712
<BONDS> 4,437,117
0
0
<COMMON> 560
<OTHER-SE> 3,318,811
<TOTAL-LIABILITY-AND-EQUITY> 15,954,685
<SALES> 0
<TOTAL-REVENUES> 20,506,069
<CGS> 0
<TOTAL-COSTS> 5,709,027
<OTHER-EXPENSES> 13,528,886
<LOSS-PROVISION> 557,844
<INTEREST-EXPENSE> 202,362
<INCOME-PRETAX> 577,124
<INCOME-TAX> 230,850
<INCOME-CONTINUING> 346,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 346,274
<EPS-PRIMARY> 6,183.46
<EPS-DILUTED> 6,183.46
</TABLE>
