<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 0-11488
PHYSICIAN PARTNERS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 91-1217068
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(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
111 SW Columbia Street, Suite 725
Portland, Oregon 97201
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(503) 224-2249
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
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(Title of Class)
None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The number of shares of the Registrant's Common Stock outstanding as of
March 30, 1998 was 6,464,196.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
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PAGE
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PART I
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Item 1: Business
Item 2: Properties
Item 3: Legal Proceedings
Item 4: Submission of Matters to a Vote of Security Holders
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
Item 6: Selected Financial Data
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 8: Financial Statements and Supplementary Data
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10: Directors and Executive Officers of the Registrant
Item 11: Executive Compensation
Item 12: Security Ownership of Certain Beneficial Owners and Management
Item 13: Certain Relationships and Related Transactions
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
</TABLE>
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PART I
ITEM 1: BUSINESS
OVERVIEW
Physician Partners, Inc. ("PPI" or "Company") is a physician practice management
("PPM") company that operates primary care and multi-specialty clinics in the
Pacific Northwest. PPI was formed in June 1996 in connection with certain
reorganization and merger transactions (the "Transactions") contemplated by the
Amended and Restated Agreement and Plan of Reorganization and Merger (the
"Reorganization and Merger Agreement") among Medford Clinic, PC ("Old Medford"),
HealthFirst Medical Group, PC ("Old HealthFirst"), The Corvallis Clinic, PC
("Old Corvallis" and, together with Old Medford and Old HealthFirst, referred
to herein, collectively, as the "Old PCs"), and PPI, which Transactions were
consummated on February 1, 1997.
The Transactions resulted in a separation of operations of each of the Old PCs
between medical professional services activities (i.e., Old providers of
medical services) and the physician practice management activities of the
business. Pursuant to the Merger, the physician practice management business,
along with substantially all of the assets and liabilities of the Old PCs
(including cash, receivables, inventories, prepaids, property, plant and
equipment, payables, accruals, debt, and certain contractual commitments)
became the assets and liabilities of PPI. The New PCs are responsible for
providing medical services and incur the related costs for provider
compensation and benefits. The assets transferred to the New PCs, which
had nominal value, include the employment agreements between each Old PC and its
providers, certain provider contracts under which the New PCs will be receiving
fee-for-service compensation and patient medical records.
As an integral part of the Transactions, PPI and each of the New PCs entered
into a 40-year management agreement (the "Management Agreement") whereby PPI
provides physician practice management services to such New PCs. PPI provides
to the new PCS, among other things, management and administrative services,
capital resources, facilities, equipment and supplies. As consideration, PPI is
entitled to (a) reimbursement of all management costs and expenses ("Manager's
Expenses") incurred by PPI in connection with the Management Agreement and (b)
a management fee equal to 16% of (i) net revenues relating to services provided
by the New PCs less (ii) Manager's Expenses.
The Management Agreement provides for the establishment of the Joint
Management Board of the New PC. The Joint Management Board is designed to
represent the clinical and physician perspective and the management and
business perspective. The Joint Management Board consists of six members,
with three members appointed by the New PC (physician members of the New PC)
and three members appointed by PPI (one of whom must be a local PPI group
practice administrator). The Medical Director of the New PC serves as a
seventh ex officio, non-voting member of the Joint Management Board. The Joint
Management Board provides local expertise and develops and approves all
proposals submitted to PPI for it's approval regarding the New PC's growth,
annual budgets, payor relations, local strategic initiatives and capital
improvements.
<PAGE> 4
GENERAL
The mission of PPI is to pioneer innovative health care delivery into the 21st
century as a leading primary care-based multi-specialty physician practice
management company. To achieve such goal, PPI endeavors to enable its affiliated
clinics to deliver health care with sound ethical standards by involving
physicians at every level of PPI, including clinical and business policy
development and decisions. PPI continuously seeks to innovate to enable the New
PCs 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 operates as a PPM organization, focusing on
the long-term management of high quality, well-positioned primary care based
multi-specialty group practices. PPI typically acquires certain assets of
established medical groups, such as their equipment and accounts receivable, and
manages such medical groups under a long-term management agreement. Because PPI
does not employ physicians and does not practice medicine, it does 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. As of December 31, 1997, PPI has
significant geographical presence and strength in the State of Oregon with
nearly 302 providers practicing in the New PCs and various clinical delivery
sites. PPI is also distingushable in that it is owned by group practice
physicians. PPI employs a full-time Chief Medical Officer responsible for
managing the clinician and clinical issues with each New PC's Medical Director.
PPI's business and clinical managers have extensive experience with managed
care under a variety of payment methodologies due to the fact that PPI is the
surviving corporation of a merger of three successful primary care-based
multi-specialty groups which have, collectively, more than 150 years of
group practice and group practice management experience.
PPI also has a Medical Ethicist as an advisor to the Board of Directors in
order to assist the physicians affiliated with PPI in adherence with the
fundamental principles of medical ethics, acting as advocates for their patients
and providing quality patient care. The Medical Ethicist attends board
meetings of PPI and advises the Board regarding ethical implications of the
issues with which the PPI Board must deal.
Business Strategy
PPI's strategy is to consolidate medical group practices into networks of health
care providers. Although PPI's operations are currently concentrated in the
Pacific Northwest, PPI intends to explore growth opportunities nationally.
Within each of its managed clinics, PPI seeks to achieve a mix of primary care
and specialty physicians who can provide services necessary to establish a
significant market presence. PPI enhances medical group operations by
standardizing financial reporting; centralizing contract negotiations; seeking
best administrative and clinical practice; improved data management; group
purchasing, and capital investment.
PPI seeks to affiliate with highly productive medical groups with significant
market share where they practice and which have strong reputations among
patients, payors and peers for providing quality medical care. PPI seeks to
acquire the operating assets of these practices and contract with the medical
groups for 40 years for management services in exchange for a management fee.
PPI's profitability then depends, to a certain extent, 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 integrates practices via financial and clinical systems and offers
groups the opportunity to maintain market competitive compensation, to gain
increased access to capital, greater management expertise, more sophisticated
information systems and more attractive managed care contracts.
The key elements of PPI's strategy include:
Strengthen Operational Efficiencies.
Cost reductions can be made through economies of scale in purchasing
supplies, equipment, insurance and services.
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Operational efficiencies may also be achieved by expanding PPI's market
coverage and number of health maintenance organization ("HMO") enrollees,
refining utilization management programs, increasing standardization,
developing additional in-house specialty and ancillary services, increasing
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 within
those markets. PPI has invested capital in each of the three New PCS and
intends to assist these practices in acquiring existing local medical
groups. Such 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) a strong
reputation for providing high quality medical care in its community.
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 independent practice associations ("IPAs")
and provider hospital organizations ("PHOs"). PPI may consider acquiring
the assets of physicians from hospital systems, HMOs or academic medical
centers.
SERVICES
Each clinic affiliated with PPI offers a wide range of primary and specialty
physician care and ancillary services through organized physician groups.
Approximately 52% of the providers affiliated with PPI are primary care
providers and approximately 48% practice various medical and surgical
specialties. The primary care physicians are those concentrating in family
practice, internal medicine and pediatrics.
Medical and surgical specialties include:
Allergy and Asthma Neurology
Behavioral Health Obstetrics
Cardiology Occupational Medicine
Critical Care Oncology
Dietician Ophthalmology
Dermatology Optometry
Endocrinology Orthopedics
Gastroenterology Otolaryngology
Gynecology Podiatry
Hematology Rheumatology
Immunology Surgery- General and Vascular
Infectious Disease Urology
Nephrology
In addition to medical services, the clinics affiliated with PPI offer a number
of ancillary services through facilities within their offices, including
cardiopulmonary and clinical laboratories, renal dialaysis, physical therapy and
radiology facilities, optical dispensary and pharmacies.
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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 Old PCs 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 Old PCs, the New PCs
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 Old PCs 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 Old PCs prior to the consummation
of the Merger would be construed to comply with the fraud and abuse laws in all
respects by applicable federal and state authorities. PPI or the New PCs, as
successors in interest to the Companies, would be subject to liability in
connection with any enforcement action taken against the Old PCs by a
regulatory enforcement agency with respect to such laws.
Physician Self-Referral Law
Significant prohibitions against physician self-referrals for services covered
by Medicare and Medicaid programs were enacted, subject to certain exceptions,
by Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as Stark II, amended prior physician self-referral
legislation known as Stark I (which applied only to clinical laboratory
referrals) by enlarging the list of services and investment interests to which
the self-referral prohibitions apply. Effective January 1, 1995, Stark II
prohibits a physician, or a member of his or her immediate family, from making
referrals for certain "Designated Health Services" to entities in which the
physician has an ownership or investment interest, or with which the physician
has a compensation arrangement. In addition to the conduct directly prohibited
by the law, the statute also prohibits schemes that are designed to obtain
referrals indirectly that cannot be made directly. The penalties for violating
the law include (i) a refund of any Medicare or Medicaid payments for services
that resulted from an unlawful referral, (ii) civil fines, and (iii) exclusion
from the Medicare and Medicaid programs. "Designated Health Services" include,
among other things, clinical laboratory services, radiology and other
diagnostic services, radiation therapy services, durable medical equipment,
prosthetics, outpatient prescription drugs, home health services and inpatient
and outpatient hospital services. Stark II prohibitions include referrals
within the physician's own group practice (unless the practice satisfies the
"in-office ancillary services" exception) and referrals in connection with
physicians' employment arrangements (unless the arrangement satisfies the
"in-office ancillary services" or "employment" exceptions). In addition, Stark
II applies to indirect financial arrangements. To the extent physicians managed
by the Company are determined to have an indirect financial relationship with
physicians in separate practices which are managed by the Company, absent a
Stark II exception, referrals for Designated Health Services between physicians
in different practices could be prohibited. Stark II also prohibits billing the
Medicare or Medicaid programs for services rendered in conjunction with
prohibited referrals. Noncompliance with, or violation of, Stark II can result
in exclusion from the Medicare and Medicaid programs and civil penalties. The
Company believes that its operations and those of the New PCs as presently
conducted do not pose a material risk of liability under Stark II, primarily
because PPI does not currently provide "Designated Health Services."
Nevertheless, there can be no assurance that Stark II will not be interpreted or
hereafter amended in a manner that has a material adverse effect on the
Company's operations as presently conducted.
In this regard, on January 9, 1998, the Health Care Financial Administration
published proposed regulations interpreting the scope and refining the
application of the Stark II law. These regulations provide, in the case of
Designated Health Services provided by a "group practice," that the overhead
expenses and income from such group practice must be distributed according to
methods that indicate that the practice is a unified business and not based on
each satellite office operating as if it were a separate enterprise. Only "group
practices" as defined by Stark II can utilize the general exception under the
law for "in-office ancillary services." There can be no assurance that the
distribution methodology of the New PCs will meet the unified business
requirement or that each of the New PCs otherwise will be deemed to be a "group
practice" if challenged. A determination that sharing of overhead expenses and
income by the New PCs does not comply with Stark II or failure to satisfy any
other criteria necessary to qualify for the "in-office ancillary services"
exception to the Stark II prohibition would preclude physician owners of a New
PC from referring Medicare/Medicaid patients to such New PC for Designated
Health Services, and could have a material adverse effect on the Company.
In addition, the proposed regulations contemplate that the issuance to
physicians of stock in a company prior to such company being publicly traded may
not satisfy the Stark exception for ownership interests in publicly traded
companies. Thus, to the extent PPI becomes a provider of Designated Health
Services, the New PC physicians who have received stock in PPI before it is
public may be precluded from them making Medicare/Medicaid referrals to the
Company and, under certain circumstances, to other affiliated medical groups,
for Designated Health Services, which could have a material adverse impact on
the Company.
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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 New PC
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 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 are separate legal entities 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 significant 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,
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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.
COMPETITION
In general, both the physician management industry and the health care provider
industry are highly competitive. Competition in the provision of medical
services in the markets where PPI operates come 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 New PCs, hospital systems
employ primary care physicians who compete directly against the New PCs. While
PPI seeks 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 three,
MedPartners, Inc. ("MedPartners"), American Oncology Resources ("AORI") and
PhyCor , Inc. ("PhyCor") have a presence in any of the markets currently served
by the New PCs. All of these publicly traded PPMs have holdings in the Portland,
Oregon market. MedPartners manages a 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. AORI has oncology
providers in the Portland market which are in direct competition with
HealthFirst's oncology practice and PhyCor has an indirect presence in the
Portland market at the Vancouver Clinic in Vancouver, Washington. 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
directly competes with public as well as private physician practice management
companies. There can be no assurance that PPI can successfully compete against
other PPMs in such markets in the future.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 1,600 people
including 17 in the corporate office. None of the Company's employees is in a
labor union and the Company considers its relations with its employees to be
excellent.
INSURANCE
The business of the Company entails an inherent risk of claims of provider
professional liability. To protect its overall operations from such potential
liabilities, the Company maintains professional liability insurance and general
liability insurance on a claims-made basis. 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. The Company
carries worker's compensation insurance and maintains multiperil liability,
fiduciary liability, employee dishonesty, professional liability, general
liability and directors and officers' insurance. The Company believes these
types of insurance to be customary and reasonable for a business of its kind.
ITEM 2: PROPERTIES
The Company's executive office is located at 111 SW Columbia Street, Portland,
Oregon. The Company believes these arrangements and the additional locations
discussed below are adequate for its current uses and anticipated growth.
In addition to the corporate office, the Company leases and occupies clinics,
offices or facilities in 24 locations throughout the Portland, Corvallis and
Medford, Oregon areas.
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In connection with the Medford Clinic, PC, two other properties, the Redwood
Dialysis Center and the Rogue Valley Dialysis Center facilities, are currently
owned by PPI. The mortgages of these properties were assumed by the Company as a
result of the Merger.
ITEM 3: LEGAL PROCEEDINGS
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 practice medicine, it is
subject to the risks associated with medical malpractice and related litigation.
PPI along with the New PCs are currently engaged in the defense of lawsuits
arising in the ordinary course and conduct of its business. PPI believes that
such actions will not have a material effect on its business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1997 Annual Meeting of Stockholders of PPI was held on January 28, 1998.
Three Class 1 Directors, Tim E. Dupell, Michael F. Bonazzola, M.D. and Mark
Leavitt, M.D., were elected to the Board of Directors of PPI at such meeting.
The term of the new directors commences on January 28,1998 and expires at the
annual meeting of stockholders to be held in 2000. David M. Goldberg, M.H.A.,
Bruce E. Van Zee, M.D., David H. Cutsforth, Jr., M.D., Russell A. Dow, M.D. and
Douglas M. Mancino, Esq. and Dan Gregorie, M.D. continued as directors after
the 1997 Annual Meeting of Stockholders. The following chart tabulates the
number of votes cast for and against each director nominated for election at
such Annual Meeting; there were no abstentions.
For Against
Tim E. Dupell 3,844,203 419,798
Michael F. Bonazzola, M.D. 4,122,522 141,479
Mark Leavitt, M.D. 4,149,349 114,652
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
There is no public trading market for the Company's common stock.
<PAGE> 10
ITEM 6: SELECTED FINANCIAL DATA
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For the Period
from Inception
(June 20, 1996) For the Year ended
to December 31, December 31,
(Thousands of dollars, except earnings per share) 1996 1997
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STATEMENT OF OPERATIONS DATA:
REVENUES:
Reimbursement of Manager's Expenses $ -- $ 102,617
Management Fees -- 5,932
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Total Revenues -- 108,549
Total Operating Expenses -- 104,998
Total Operating Income (Loss) -- 3,551
Reorganization Costs 4,955 718
Other Non-Operating Income (Expenses) -- (2,699)
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Income (Loss) Before Taxes (4,955) 134
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Income Tax Expense (Benefit) -- --
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Net Income (Loss) (4,955) 134
========= =========
Net Income (Loss) Applicable to Common Shareholders (4,955) (3,706)
Earnings (Loss) Per Share $ (107.37) $ (0.63)
BALANCE SHEET DATA:
Working Capital (Deficit) $ (93) $ 889
Total Assets 100 73,831
Long Term Debt, net -- 8,177
Capital and Direct Financing Lease Obligations, net -- 17,841
Preferred Redeemable Stock and Related Warrants -- 17,910
Shareholders' Equity 3 (1,362)
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes some forward-looking statements that involve a
number of risks and uncertainties. Actual results may differ materially from
historical results or from the results discussed in such forward-looking
statements or outcomes otherwise currently expected or sought by PPI.
OVERVIEW
PPI is a physician practice management company ("PPM") that operates primary
care and multi-specialty clinics in the Pacific Northwest. PPI was formed in
June 1996 in connection with certain reorganization and merger transactions (the
"Transactions") contemplated by the Amended and Restated Agreement and Plan of
Reorganization and Merger (the "Reorganization and Merger Agreement") among
Medford Clinic, PC ("Old Medford"), HealthFirst Medical Group, PC ("Old
HealthFirst"), The Corvallis Clinic, PC ("Old Corvallis," and, together with Old
Medford and Old HealthFirst, referred to herein, collectively as "the Old PCs",
and PPI, which transactions were consummated on February 1, 1997. Pursuant to
the terms of the Reorganization and Merger Agreement, each Old PC affected (a) a
reorganization (the "New PC Reorganization") of its corporate structure by (i)
incorporating a wholly-owned professional corporation subsidiary ( a "New PC"),
(ii) transferring to the
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New PC certain assets and liabilities relating to the provider professional
services business, (iii) making a pro rata distribution to its shareholders of
all of the capital stock of the New PC, (iv) converting such Old PC from a
professional corporation to a business corporation and (v) entering into a
40-year management agreement (the "Management Agreement") with PPI and (b) a
merger (the "Merger") with and into PPI, resulting in consolidation of the
operations (other than the provider professional services businesses) of the Old
PCs.
In exchange for providing management services under the Management Agreement,
and certain facilities and equipment to the managed clinics, PPI is reimbursed
for all managerial costs and expenses ("Manager's Expenses") incurred by PPI and
is paid a management fee. The management fee is 16% of (i) net revenues relating
to services provided by the New PCs less (ii) Manager's Expenses. PPI has a
Management Agreement with each of the three New PCs, i.e., HealthFirst Medical
Group, PC, Medford Clinic, PC and The Corvallis Clinic, PC
The three New PCs have 25 clinical delivery sites and nearly 302 providers.
PPI's strategy is to pioneer innovative health care delivery into the 21st
century as a leading primary care-based multi-specialty group PPM. PPI endeavors
to deliver high quality health care by involving physicians at every level of
the organization. The majority of PPI's common stock is owned by physicians and
the Board of Directors maintains a physician majority.
To increase revenues, PPI is working with the New PCs to recruit additional
physicians, merge other physician groups in the area into the New PCs, and aid
in the negotiation of managed care contracts. PPI is working on initiatives
anticipated to reduce the New PCs' Manager's Expenses through regional
purchasing and insurance contracts and through the consolidation of various
services. PPI intends to expand its presence in the Pacific Northwest through
acquisitions of physician groups in new areas.
In 1997, PPI began modifying its computer system programming to process
transactions in the year 2000. Anticipated spending for this modification will
be expensed as incurred and is not expected to have a significant impact on the
Company's onging results of operations.
RESULTS OF OPERATIONS
Reorganization costs of $0.7 million in the year ended December 31, 1997 and
$1.3 million in the period ended December 31, 1996 were incurred to complete the
Transactions. These costs consisted of legal, accounting and printing expenses
and will not continue after 1997. Corporate costs of $2.8 million and $.7
million in 1997 and 1996, respectively, consisted of the Salaries, Wages and
Benefits of PPI management, outside professional expenses, and the operating
expenses of the corporate office. These costs will increase in 1998 as PPI
continues to build its management team.
PRO FORMA INFORMATION
As previously discussed, the Merger of the Old PCs with and into PPI became
effective February 1, 1997. As a result of the Merger, PPI succeeded to the
ownership of substantially all of the assets and liabilities of the Old PCs.
Also, an integral part of the Merger was the Management Agreement that calls for
PPI providing physician practice management services to each of the three New
PCs.
The actual results reflect only eleven months of post Merger operating
activities in the twelve months ended December 31, 1997 and no operating
activities for 1996. Summarized unaudited pro forma financial information
<PAGE> 12
is presented below. The pro forma balance sheet is presented as if the Merger
had occurred on December 31, 1996, and the pro forma income statements are
presented as if the Merger had taken place on January 1, 1996.
Summarized Unaudited Pro Forma Balance Sheet as of December 31, 1996 (all
amounts are in thousands):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
ASSETS:
Current Assets $25,050
Property, Plant and Equipment 45,064
Other Assets 1,032
-------
Total Assets 71,146
=======
LIABILITIES:
Current Liabilities 33,945
Long-Term Debt and Capital Lease Obligations 28,602
Other Long-Term Liabilities 6,489
-------
Total Liabilities 69,036
-------
SHAREHOLDERS' EQUITY 2,110
-------
Total Liabilities and Shareholders' Equity $71,146
=======
</TABLE>
Summarized Unaudited Pro Forma Income Statement as of December 31, 1996 and 1997
(all amounts are in thousands, except earnings per share):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
REVENUES:
Reimbursement of Manager's Expenses $ 107,594 $ 111,566
Management Fees 5,655 6,375
--------- ---------
Total Revenues 113,249 117,941
OPERATING EXPENSES:
Clinic Salaries, Wages and Benefits 47,320 47,162
Medical and Office Supplies 16,814 17,517
General and Administrative Expenses 11,792 13,282
Purchased Medical Services 20,168 21,867
Lease and Rent 3,038 3,770
Depreciation and Amortization 5,259 4,767
Corporate Costs 2,900 2,899
--------- ---------
Total Operating Expenses 107,291 111,264
Total Operating Income 5,958 6,677
Other Income (Expenses) (3,203) (2,973)
--------- ---------
Net Income Before Provision For Income Taxes 2,755 3,704
Provision for Income Taxes (1,047) (1,408)
--------- ---------
Net Income $ 1,708 $ 2,296
========= =========
Earnings per Share - Basic $ 0.29 $ 0.39
========= =========
Earnings per Share - Diluted $ 0.24 $ 0.32
========= =========
</TABLE>
<PAGE> 13
This pro forma financial information has been prepared by PPI based on the
historical financial statements of PPI and the Old PCs. The pro forma income
statements reflects the following adjustments to historical results:
a. Elimination of net revenues of the Old PCs from providing medical services
as these revenues will be retained by the New PCs for the year ended
December 31, 1996 and the period ended January 31, 1997.
b. Elimination of historical costs for provider compensation and benefits as
such costs will be the responsibility of the New PCs for the year ended
December 31, 1996 and the period ended January 31, 1997.
c. Addition of the revenues to be earned by PPI under the terms of the
Management Agreement for the year ended December 31, 1996 and the period
ended January 31, 1997.
d. PPI's corporate overhead costs in 1997 were adjusted to include the costs in
January 1997. The 1996 results were adjusted to reflect corporate overhead
costs similar to 1997.
e. Elimination of nonrecurring costs related to the New PC Reorganization and
Merger.
f. Elimination of historical provision for income taxes and addition of
provision for income taxes based on pro forma pretax net income.
g. Elimination of $1.5 million of transition plan expenses and $1.0 million
provision against the receivables from the New PCs in 1997.
The pro forma income statements may not be indicative of actual results if the
Transactions had occurred on the dates indicated or which may be realized in the
future.
PRO FORMA RESULTS:
The increase in the reimbursement of Manager's Expenses of $4.0 million, or
3.7%, to $111.6 million for the twelve months ended December 31, 1997 from
$107.6 million for the twelve months of 1996 is mainly attributable to increases
in Purchased Medical Services and General and Administrative expenses. Purchased
Medical Services increased $1.7 million or 8.4% to $21.9 million in 1997
compared to $20.2 million in 1996 due to an increase in capitated lives in the
various managed care plans and higher utilization. Manager's Expenses will
continue to increase as the New PCs' revenues increase, however, they are
expected to remain relatively stable as a percentage of net revenues. The $1.5
million increase in General and Administrative expenses is due to various
consulting projects completed in 1997.
The $0.7 million increase in management fees for the year ended December 31,
1997 compared to 1996 is due to an increase in the New PCs' revenues of $8.1
million only partially offset by the increase in Manager's Expenses of $4.0
million. PPI anticipates that management fee revenue will continue to increase
as the New PCs' operating results improve and PPI acquires the assets of
additional clinics.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Working capital increased from a $.1 million deficit at December 31, 1996 to a
surplus of $.9 million at December 31, 1997 which is due to the assumption of
the Old PCs' assets and liabilities on February 1, 1997. Based on the pro forma
December 31, 1996 balance sheet, working capital increased $9.8 million to a
$.9 million surplus from an $8.9 million deficit at December 31, 1996. The
increase is due to a construction loan classified as short-term at December 31,
1996 being converted to long-term debt in the second quarter 1997 and the use of
the proceeds from the sale of preferred stock to reduce current liabilities.
Cash flows from operations used $4.1 million in the year ended December 31,
1996 and used $2.3 million in the year ended December 31, 1997. The use of funds
in the year ended December 31, 1996 is primarily due to the net increase in
the Receivable from New PCs of $3.0 million and the $2.5 million decrease in
accrued compensation which were partially offset by an increase in drafts.
The decrease in accrued compensation is due to funding the 1996 employer's
portion of HealthFirst's and Medford's defined contribution plans with
proceeds from the sale of preferred stock to First Union (see subsequent
section - "Redeemable Preferred Stock").
At December 31, 1997, PPI had cash and cash equivalents of approximately $1.8
million and $9.5 million available under its operating line of credit. PPI
believes that the cash and cash equivalents, combined with the line of credit
and cash flows from operations is sufficient to meet PPI's planned capital
expenditures and working capital needs for the next 12 months.
<PAGE> 14
Capital Expenditures
Capital expenditures in the year ended December 31, 1997 were $2.6 million.
Capital expenditures during 1997 consist mainly of purchases of medical and
office equipment. Capital expenditures in 1998 could increase if certain
investments are made in ancillary services.
Line of Credit
The Transactions resulted in PPI assuming all debt obligations of the Old PCs.
The Old PCs previously had separate lines of credit with an aggregate $5.5
million limit. In February 1997, the individual lines of credit were
consolidated into one operating line of credit with a $7.5 million limit made
available by U.S. Bank of Oregon. In August 1997, the line of credit was
increased to $15.0 million in anticipation of potential acquisitions. PPI, at
it's discretion, may make borrowings at prime rate or in $.5 million increments
at LIBOR plus LIBOR margin. At December 31, 1997, $5.5 million was outstanding
under the line of credit with an effective interest rate of 8.5%. The line has
an annual commitment fee on the unused portion of .375%. The line of credit
contains certain covenants which amoung other things, require PPI to meet
certain fininancial obligations. However, subsequent
to year-end the Bank agreed to waive the covenant violations for the year ended
December 31, 1997. At December 31, 1997, PPI had approximately $9.5 million
available under the operating line of credit.
Redeemable Preferred Stock
On July 10, 1997, PPI and First Union Capital Partners, Inc. ("First Union")
entered into the Preferred Stock and Warrant Purchase Agreement (the "Purchase
Agreement"). Pursuant to the Purchase Agreement, First Union purchased from PPI,
for a total purchase price of $15 million (i) 15,000 shares of Series B
Cumulative Redeemable Preferred Stock of PPI ("Preferred Shares") and (ii) a
Common Stock Purchase Warrant (the "Warrant") to purchase up to 1,799,893 shares
(the "Warrant Shares") of Class B Common Stock of PPI at an exercise price of
$.01 per share. The Preferred Shares rank senior to all other classes of capital
stock of PPI as to liquidation, dividends, redemptions and any other payment or
distribution with respect to capital stock. Any portion of the Preferred Shares
may be redeemed at any time at a price equal to $1,000 per share plus accrued
and unpaid dividends, which accrues at the annual rate of 9%, provided that all
Preferred Shares must be redeemed by June 30, 2005 or earlier upon the
occurrence of certain enumerated events (including change in control of PPI,
public offering by PPI, failure by PPI to meet certain financial covenants or a
material breach under the Purchase Agreement).
The number of Warrant Shares that First Union may purchase under the Warrant may
be reduced to 687,919 shares if the Preferred Shares are redeemed in full by
June 30, 1998, to 942,784 if redeemed in full by June 30, 1999 and to 1,212,228
if redeemed in full by June 30, 2000. First Union has the right to sell to PPI
the Warrant and the Warrant Shares at a price equal to fair market value after
June 30, 2002 or, if earlier, upon the occurrence of certain enumerated
events, which events are similar to those that piggyback and other
registration rights. First Union and any subsequent holders of Preferred
Shares, the Warrant and Warrant Shares are prohibited from transferring such
securities to any competitor of PPI.
The warrant was valued at $6,115 at July 10, 1997. The value was based on
probability factors assigned to the various share amounts which may be issued
and the fair market value per share. The warrants and preferred stock are
being accreted up to their fair market value to the earliest potential
redemption date. At December 31, 1997 the value of the warrants approximates
the redemption value at June 30, 1998. The preferred stock was valued at
$8,590 at July 10, 1997. The preferred stock is being accreted up to its
redemption value of $15,000 by June 30, 1998. Accordingly, $3,205 of
accretion has been charged to Retained Earnings in 1997.
Of the available proceeds (net of $.3 million of transaction costs) $13.3
million were used during the year ended December 31, 1997 to retire debt of $9.9
million and fund accrued pension contributions of $3.4 million assumed by PPI in
the Transactions. The retirement of debt will reduce future interest expense and
principal payments.
It is uncertain at this time what funds will be used to redeem the preferred
stock. Management will continue to evaluate the various sources of financing
available, including but not limited to, traditional commercial bank debt,
private debt, private equity, public equity and public debt.
Acquisitions
PPI is currently involved in acquisition discussions with various medical
clinics. PPI has entered into an initial agreement with one clinic and is
currently negotiating letters of intent with other clinics. Management
anticipates consummating a transaction in the second quarter of 1998. Management
believes the existing line of credit of $15.0 million, with availability of $9.5
million as of December 31, 1997, is adequate to fund these acquisitions.
<PAGE> 15
Management continues to evaluate various alternatives to finance potential
acquisitions which may exceed the existing available funding. Such alternatives
include but are not limited to, traditional commercial bank debt, private debt,
private equity, public equity and public debt. The availability and timing of
these alternatives depend on market and other conditions and the acceptability
of the terms of such financing alternatives to PPI.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and accompanying notes to financial statements,
together with the report of independent public accountants are located on the
following pages.
<PAGE> 16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Physician Partners, Inc.:
We have audited the accompanying balance sheets of Physician Partners, Inc. (a
Delaware corporation) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the period
from inception (June 20, 1996) to December 31, 1996 and for the year ended
December 31, 1997. 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 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 Physician Partners, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the period from inception (June 20, 1996) to December 31, 1996 and for the
year ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 27, 1998
<PAGE> 17
PHYSICIAN PARTNERS, INC.
BALANCE SHEETS--DECEMBER 31, 1996 AND 1997
(All dollar amounts are expressed in thousands)
ASSETS
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4 $ 1,761
Restricted Investments -- 250
Patient accounts receivable, net of allowances for contractual
discounts and uncollectible accounts of $0 and $10,591 at
December 31, 1996 and 1997, respectively -- 17,094
Healthcare and other receivables -- 5,702
Inventories of drugs and supplies -- 408
Prepaid expenses and deposits -- 1,405
------- -------
Total current assets 4 26,620
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
and amortization of $8 and $25,063 at December 31, 1996 and
1997, respectively 89 42,992
OTHER ASSETS:
Receivables from New PCs, net of allowance of $1,000 -- 2,979
Investments in affiliates -- 1,003
Other 7 237
------- -------
Total assets $ 100 $73,831
======= =======
</TABLE>
<PAGE> 18
PHYSICIAN PARTNERS, INC.
BALANCE SHEETS--DECEMBER 31, 1996 AND 1997 (CONTINUED)
(All dollar amounts are expressed in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ -- $ 5,460
Payable to clinics 97 --
Current portion of long-term debt and capital and direct
financing lease obligations -- 1,112
Drafts payable -- 3,026
Accounts payable and accrued expenses -- 4,001
Accrued healthcare costs -- 6,565
Accrued compensation and related expenses -- 5,079
Deferred revenue -- 488
-------- --------
Total current liabilities 97 25,731
DIVIDENDS PAYABLE -- 635
LONG-TERM DEBT, net of current portion -- 8,177
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of current
portion -- 17,841
DEFERRED COMPENSATION AND OTHER -- 4,899
REDEEMABLE PREFERRED STOCK AND RELATED WARRANT -- 17,910
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock-
Class A - Voting; $0.01 par value; 20,000,000 shares authorized; 138,000 and
6,435,696 shares issued and
outstanding at December 31, 1996 and 1997, respectively 1 64
Class B - Voting; $0.01 par value; 30,000,000 shares
authorized; no shares issued or outstanding -- --
Treasury stock, at cost -- (748)
Additional paid in capital 5,008 9,626
Accumulated deficit (4,955) (8,661)
Notes receivable from stockholders (51) (736)
Unamortized value of restricted stock awards -- (907)
-------- --------
Total stockholders' equity (deficit) 3 (1,362)
-------- --------
Total liabilities and stockholders' equity (deficit) $ 100 $ 73,831
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 19
PHYSICIAN PARTNERS, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(All dollar amounts are expressed in thousands
except loss per share)
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
REVENUES:
Reimbursement of manager's expenses $ -- $ 102,617
Management fees -- 5,932
--------- ---------
Net revenues -- 108,549
OPERATING EXPENSES:
Clinic salaries, wages and benefits -- 43,160
Purchased medical services -- 20,291
Medical and office supplies -- 16,054
General and administrative expenses -- 12,338
Lease and rent expense -- 3,471
Depreciation and amortization -- 4,376
Corporate costs 693 2,808
Transition plan expenses -- 1,500
Provision for Receivables from New PCS -- 1,000
--------- ---------
Total operating expenses 693 104,998
--------- ---------
Operating income (Loss) (693) 3,551
OTHER INCOME (EXPENSE):
Other income -- 65
Interest income -- 684
Interest expense -- (3,448)
Reorganization costs (4,262) (718)
--------- ---------
Net income (loss) before provision for income taxes (4,955) 134
--------- ---------
PROVISION FOR INCOME TAXES -- --
--------- ---------
NET INCOME (LOSS) (4,955) 134
ACCRETION ON PREFERRED STOCK -- 3,205
PREFERRED STOCK DIVIDENDS -- 635
--------- ---------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (4,955) $ (3,706)
========= =========
LOSS PER BASIC AND DILUTED SHARE $ (107.37) $ (.63)
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 20
PHYSICIAN PARTNERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
Class A
Common Stock Unamortized Note
------------------ Treasury Additional Value of Receivable
Number Stock, Paid in Restricted from Accumulated
of Shares Amount at Cost Capital Stock Awards Stockholders Deficit Total
--------- ------ -------- ---------- ------------ ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock 138,000 1 -- 746 -- -- -- 747
Stock subscription
receivable -- -- -- -- -- (51) -- (51)
Reorganization costs
incurred by
Founding Clinics -- -- -- 4,262 -- -- -- 4,262
Net loss -- -- -- -- -- -- (4,955) (4,955)
--------- ---- -------- ---------- ------------ ------------ ----------- -------
BALANCE, December 31,
1996 138,000 1 -- 5,008 -- (51) (4,955) 3
Contribution of old
PC net assets 6,337,607 43 -- 4,786 (1,192) (974) -- 2,683
Retirement of common,
stock (3,000) -- -- -- -- -- -- --
Forfeiture of common
stock (36,911) -- -- (168) 111 -- -- (57)
Repurchase of common
stock -- -- (748) -- -- 71 -- (677)
Repayment of stock
subscription -- -- -- -- -- 218 -- 218
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 21
PHYSICIAN PARTNERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
Class A
Common Stock Unamortized Note
---------------- Additional Value of Receivable
Number Treasury Paid in Restricted from Accumulated
of Shares Amount Stock Capital Stock Awards Stockholder Deficit Total
--------- ------ ----- ------- ------------ ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amortization of stock
awards -- $ -- $ -- $ -- $ 174 $ -- $ -- $ 174
Preferred stock
dividends -- -- -- -- -- -- (635) (635)
Accretion on
preferred stock -- -- -- -- -- -- (3,205) (3,205)
Net income -- -- -- -- -- -- 134 134
--------- ---- ----- ------ ----- ----- ------- ------
BALANCE, December 31,
1997 6,435,696 $ 64 $(748) $9,626 $(907) $(736) $(8,661) $(1,362)
========= ==== ===== ====== ===== ===== ======= ======
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 22
PHYSICIAN PARTNERS, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(4,955) $ 134
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities-
Compensation expense for stock issued to officers and directors 693 --
Depreciation and amortization -- 4,550
Provisions for Receivables from New PCs -- 1,000
Deferred tax benefit -- <1,491>
Equity in income of affiliates -- (726)
Changes in operating assets and liabilities (excluding assets and
liabilities assumed by Physician Partners, Inc.):
Patient accounts receivable, net -- 160
Healthcare and other receivables -- (1,216)
Receivables from New PCs -- (3,979)
Inventories of drugs and supplies -- (83)
Prepaid expenses and deposits -- (621)
Other assets -- 229
Drafts payable -- 1,872
Accounts payable and accrued expenses -- (584)
Accrued healthcare costs -- 219
Deferred revenue -- (102)
Accrued compensation and related expenses -- (2,463)
Deferred compensation and other -- (637)
Other liabilities -- (322)
------- -------
Net cash provided by (used in) operating activities (4,262) (4,060)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (98) (2,554)
Proceeds from investments (7) 440
------- -------
Net cash used in investing activities (105) (2,114)
</TABLE>
<PAGE> 23
PHYSICIAN PARTNERS, INC.
STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock $ 3 $ --
Borrowings from Founding Clinics 106 --
Net payments on borrowings under line of credit agreement -- (640)
Principal payments on long-term debt and direct financing lease
obligation -- (7,827)
Proceeds from repayments of notes receivable from stockholders -- 218
Cash assigned to Physician Partners, Inc. in merger -- 1,358
Proceeds from issuance of preferred stock -- 14,705
Purchase of treasury stock -- (601)
Costs incurred related to PPI transaction 4,262 718
-------- --------
Net cash provided by financing activities 4,371 7,931
-------- --------
NET INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS 4 1,757
CASH AND CASH EQUIVALENTS, beginning of period -- 4
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 4 $ 1,761
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ -- $ 4,080
Cash paid for income taxes -- 1,264
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Stock subscription receivable $ 51 $ --
In the purchase of treasury stock, PPI transferred approximately $76 of net
equipment and forgave $71 of notes receivable from stockholders.
On February 1, 1997, as a result of the Merger, PPI succeeded to the assets
and liabilities of the Old PCs. The book value of the Old PCs' assets and
liabilities, including $1 million of cash, at January 31, 1997 are
presented below:
Current assets 23,769
Property, plant and equipment 44,722
Other long-term assets 1,597
Current liabilities 28,777
Long-term liabilities 37,484
Deferred tax liability 1,491
Contributed equity 2,336
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 24
PHYSICIAN PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS
(All dollar amounts are expressed in thousands, except
loss per share)
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 ("HealthFirst"), The Corvallis Clinic, PC
("Corvallis") and The Medford Clinic, PC ("Medford"), (collectively,
"The Founding Clinics").
This transaction, which was consummated on February 1, 1997, resulted 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 were 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., cash, receivables, inventories, prepaids, property, plant and equipment,
payables, accruals, debt, and certain contractual commitments, were transferred
to PPI at historical cost. As consideration, the stockholders of the existing
Founding Clinics received stock of PPI.
An integral part of the reorganization is a 40-year management agreement that
calls for PPI to provide physician practice management services to the New PCs.
Services provided include management and administrative services, capital
resources, facilities, equipment and supplies. PPI is entitled to (a)
reimbursement of all managerial costs and expenses (Manager's Expenses) incurred
by PPI and (b) a management fee equal to 16% of (i) net revenues relating to
services provided by the New PCs less (ii) Manager's Expenses.
The New PCs are responsible for providing medical services and the related costs
for provider compensation and benefits.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Selected accounting policies are discussed below. Other significant accounting
policies regarding revenues, income taxes, professional liability and deferred
compensation are discussed in specific notes that follow.
Cash Equivalents
Cash equivalents consist of all highly liquid investments with original
maturities of three months or less.
Restricted Investments
Under Medford Clinic, P.C.'s agreement with Oregon Health Management System
("OHMS"), PPI is required to maintain $250 in a restricted or segregated
account. PPI can use these funds for purchased medical services only with
approval by OHMS.
<PAGE> 25
-2-
Concentration of Credit Risk
PPI extends credit to patients covered by commercial insurance, Medicare and
Medicaid. PPI manages credit risk with the various public and private insurance
providers, as deemed appropriate by management. Allowances for contractual
discounts and uncollectable accounts have been made for potential losses, where
appropriate. Per the terms of the Management Agreement the New PCS bear the
risk of potential losses.
Healthcare Receivables
Certain of PPI's contracts with health plans include risk-sharing features
involving PPI, participating hospital and the health plan. Amounts recorded
at year-end represent management's estimates of the net settlement amounts
expected. Differences between management's estimates and the ultimate
settlement for each health plan are recorded in the year final settlement
occurs.
Receivables from New PCs
Receivables from New PCs include advances made during 1997 to the New PCs. The
receivables bear interest at 7.6% with interest only payments due in 1998 and
principal and interest payments due over a three year period beginning January
1999. A $ 1,000 allowance has been recorded against the receivable.
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 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:
Buildings and leasehold improvements 7-40 years
Furniture and equipment 3-15 years
Accrued Healthcare Costs
Accrued healthcare costs are calculated based on reported claims and an estimate
based on historical data of incurred but not reported claims.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents, receivables, accounts
payable and accrued expenses are a reasonable estimate of their fair value based
on the short maturities of these instruments.
Interest rates that are currently available to PPI 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.
PPI does not hold or issue financial instruments or derivative financial
instruments for trading purposes.
<PAGE> 26
-3-
Notes Receivable from Stockholders
PPI maintains various agreements with stockholders for their purchase of common
stock. These agreements were originally made by The Founding Clinics and were
transferred to PPI in the Reorganization Transaction. The notes mature at
various stages through 2008.
Transition Plan Expenses
In 1997, PPI made one-time payments totalling $1,500 to the Founding Clinics.
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 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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. NET REVENUES:
<TABLE>
<CAPTION>
Corvallis HealthFirst Medford Combined
----------- ------- --------
<S> <C> <C> <C> <C>
Net Clinic revenue $39,244 $58,187 $42,261 $139,692
Less:
Manager's expenses 28,788 43,387 30,442 102,617
------- ------- ------- --------
Adjusted revenue 10,456 14,800 11,819 37,075
X16% X16% X16% X16%
------- ------- ------- --------
Management fee 1,673 2,368 1,891 5,932
Reimbursement of manager's
expenses 102,617
--------
Net revenues $108,049
========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Land and land improvements $ -- $ 3,141
Buildings and leasehold improvements 7 37,171
Furniture and equipment 90 27,648
Construction in progress -- 95
-------- --------
97 68,055
Less- Accumulated depreciation (8) (25,063)
-------- --------
89 $ 42,992
======== ========
</TABLE>
<PAGE> 27
-4-
5. FINANCING:
Long-term debt at December 31, 1997 is as follows:
<TABLE>
<S> <C>
Note payable, due in monthly installments of principal and interest of $16 through July
2000, with a final payment of $1,636, bearing interest at 9.875%. The note is secured
by building and land. $1,693
Note payable, due in monthly principal payments of $188 through January 2017,
bearing interest at 8.25%. The note is secured by building and land. 3,578
Note payable, due in monthly installments of principal and interest of $1, maturing in
October 2005, bearing interest at 8.50% 23
Note payable, due in annual principal payments of $115 through August 2011, bearing
interest at 7.90%. The note is secured by furniture and equipment. 1,535
Note payable to a related party, due in annual principal payments of $1 through 1998,
bearing interest at 6.00%. 3
Mortgage with bank, interest at 8.44%, payable in monthly installments of
principal plus interest of $2, maturing December 31, 2014, secured by first
deed on real property and equipment and fixtures. 219
Mortgage with bank, interest at 9.25%, payable in monthly installments of $5,
maturing November 1, 2008, secured by first deed on real property and
equipment and furniture and fixtures. 431
Note payable with title company, interest at 7.90%, payable in monthly
installments of $6, maturing July 1, 2013, secured by equipment and furniture
and fixtures. 668
Mortgage with bank, interest at 8.44%, payable in monthly installments of
principal plus interest of $3, maturing December 15, 2001, secured by second
deed on real property and equipment and fixtures. 201
Facilities loan with bank, interest at 9.00%, payable in monthly installments of $4,
maturing September 30, 1999, secured by equipment, furniture and fixtures and accounts
receivable. 73
Equipment loan with bank, interest at 7.25%, payable in monthly installments of
$22, maturing April 2000, secured by equipment, furniture and fixtures and
accounts receivable 432
------
Total long-term debt 8,856
Less- Current portion 679
------
Total long-term debt, net of current portion $8,177
======
</TABLE>
Maturities of long-term debt for the next five years, including current
maturities, are as follows:
<TABLE>
<S> <C>
1998 $ 679
1999 628
2000 2,040
2001 497
2002 373
Thereafter 4,639
------
Total $8,856
======
</TABLE>
PPI maintains an unsecured revolving line-of-credit agreement providing up to
$15,000. PPI, at its discretion, may make borrowings at prime rate or in $500
increments at LIBOR plus LIBOR margin. At December 31, 1997, $5,460 was
outstanding under the line of credit with an effective interest rate of 8.5%.
The line has an annual commitment fee on the unused portion of .375% and expires
in July 1999.
Under terms of the revolving line of credit agreement, certain financial ratios
and other covenants are required to be met. PPI was not in compliance with
certain of these debt covenants due to the recognition of a $1,500 transition
plan expense and $1,000 provision against the Receivables from New PCs as of
December 31, 1997. Subsequent to year-end, the Bank agreed to waive the
covenant violations for the year ended December 31, 1997. As the violation
was due to one-time adjustments made in 1997, PPI anticipates being in
compliance with all debt covenants at the next measurement date,
March 31, 1998.
<PAGE> 28
-5-
6. LEASE COMMITMENTS:
Capital Leases
PPI 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 for a term
of 21 years. Leased capital assets included in property, plant and equipment at
December 31, 1997 are as follows:
<TABLE>
<S> <C>
Buildings and leasehold improvements $3,574
Furniture and equipment 524
------
4,098
Less- Accumulated amortization (1,022)
------
$3,076
======
</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 and operating leases with initial or remaining terms of
one year or more consist of the following at December 31, 1997.
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
1998 $ 494 $ 3,539
1999 427 3,389
2000 423 2,751
2001 403 2,656
2002 403 2,442
Thereafter 5,071 9,586
------- -------
Total minimum lease payments 7,221 $24,363
=======
Amounts representing interest 3,763
------
Present value of minimum lease payments 3,458
Current portion 183
------
Long-term capitalized lease obligations $3,275
======
</TABLE>
<PAGE> 29
-6-
Direct Financing Lease Obligations
In June of 1995, Corvallis contributed land, buildings, construction in process
and related notes payable to HealthCare Partners, LLC (Note 6). At the date of
transfer, Corvallis entered into 30-year lease agreements for the Asbury,
Aumann and other buildings and a 5-year lease agreement for the Albany
building. Monthly rental payments under these leases are $184. The assets were
sold under a sale/leaseback arrangement and, therefore, this was accounted
for as a financing transaction wherein the assets remain on Corvallis' books and
continue to be depreciated. Corvallis recorded a direct financing lease
obligation for cash received by Corvallis and obligations assumed by the LLC as
part of the transaction which was assumed by PPI at February 1, 1997. The
liability for this lease obligation was $13,922 at December 31, 1997.
Scheduled principal payments at December 31, 1997 are as follows.
1998 $242
1999 266
2000 287
2001 244
2002 810
Thereafter 12,073
------
13,922
======
In May 1996, HealthFirst sold three facilities to HealthFirst Properties LLC
(Note 6) under a sale/leaseback arrangement. The facilities were sold for
$12,550, of which $11,550 is due in the form of an 8% interest-bearing note
receivable due in monthly installments through April 2016. The remainder was
received in cash. The transaction was accounted for as a financing, wherein the
property and related debt remains on Healthfirst's books and will continue to be
depreciated. A financing obligation representing the proceeds of $1,000 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 amount owed on the financing obligation at
December 31, 1997 was $894 of which $8 is due within one year. The lease has a
term of 20 years and requires minimum annual rental payments of $1,318 in 1998,
1999, 2000, 2001 and 2002 and $17,680 thereafter. PPI assumed the financing
lease obligation and the lease payments at February 1, 1997.
7. INCOME TAXES:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109). SFAS 109 requires that PPI follow the
liability method of accounting for deferred income taxes. Differences between
accounting rules and tax laws cause differences between the bases of certain
assets and liabilities for financial reporting purposes and tax purposes. The
tax effect of these differences, to the extent they are temporary, are recorded
as deferred tax assets and liabilities and consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Cash to accrual adjustments $ - $ 10,731
Allowance for uncollectible accounts - 695
Allowance for related party receivable - 400
Deductible reorganization costs capitalized for tax and
expensed for financial reporting purposes 645 538
Net operating loss carryforward - 577
Accrued expenses - 865
Other - 62
----- --------
Net deferred tax assets 645 13,868
Deferred tax liabilities
Cash to accrual adjustments - (9,997)
Property, plant and equipment basis differences - (880)
----- --------
Net deferred liability - (10,877)
Less - valuation allowance (645) (2,991)
----- --------
Net deferred taxes $ - $ -
===== ========
</TABLE>
PPI maintains a valuation allowance in an amount equal to its net deferred tax
assets because of uncertainty with respect to the realization of the related
tax benefits in future years.
The provision for income taxes, which is substantially federal expense
(benefit), is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997
---- ----
<S> <C> <C>
Current $ - $ 1,491
Deferred - (1,491)
--- -------
$ - $ -
=== =======
</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,
-----------------------
1996 1997
---- ----
<S> <C> <C>
Income tax benefit at the federal statutory rate $1,734 $ 47
State tax, net of federal tax 70 6
Nondeductible reorganization costs (691) -
Costs allocated to the Founding Clinics for tax purposes (432) -
Valuation allowance (645) (53)
Other (36) -
------ ----
Income tax provision per financial statements $ -- $ -
====== ====
</TABLE>
<PAGE> 30
-7-
8. COMMON STOCK TRANSACTIONS:
The Founding Clinics were issued the initial 3,000 shares of PPI Class A common
stock for $3 in 1996.
Stock awards aggregating 108,000 shares of PPI were granted to four officers of
the Company in October 1996. The estimated fair value of these awards in the
aggregate amount of $595 was recognized as compensation expense in
1996.
A director of the Company purchased 27,000 shares of PPI Class A common stock
for $51. The price paid for the shares was based upon an independent
appraisal. However, the estimated fair value of these shares for accounting
purposes exceeded the purchase price by $98,740 and this amount was recognized
as compensation expense in 1996.
In 1996, HealthFirst sold shares of common stock to selected providers at
prices below their estimated fair value for accounting purposes. The terms of
the related Restricted Stock Agreements require forfeiture of the stock unless
the grantee remains employed by HealthFirst until February 1, 2002. The
Unamortized value of the stock was recorded as a contra-equity account which
was assumed by PPI in the Merger. The stock was exchanged for PPI common stock
at February 1, 1997.
At February 1, 1997, 6,337,607 shares were issued to the shareholders of The
Founding Clinics in connection with the Reorganization Transaction.
9. STOCK OPTION PLANS:
The reorganization plan included various stock option plans for PPI employees
and directors, as well as providers employed by the new PCs. These plans have
reserved a total of 2,500,000 shares of PPI Class A common stock for issuance
under the plans. As of December 31, 1997 a total of 1,632,710 options had been
granted. None were cancelled or exercised during 1997.
The Company applies APB No. 25 and related Interpretations in accounting for the
plans. For SFAS No. 123 purposes, the fair value of each option grant has been
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions for grants in 1997: Dividend yield of 0%, expected
volatility of 0%, risk-free interest rate of 6%, expected life of six years. Had
compensation expense been determined consistent with SFAS No. 123. The
weighted average fair value of options granted during 1997 was $2.17.
Utilizing the assumptions detailed above, the Company's net loss per share
for the year ended December 31, 1996 and 1997, would have increased as
reflected in the following pro forma amounts:
<TABLE>
<CAPTION>
Year ended
December 31
-------------------
1996 1997
------ -------
<S> <C> <C>
Net loss
As reported (4,955) (3,706)
Pro forma (4,955) (6,328)
Net loss per basic and dilutive share:
As reported (107.37) (0.63)
Pro forma (107.37) (1.07)
</TABLE>
The resulting pro forma compensation costs may not be representative of that
expected in future years.
<PAGE> 31
-8-
The following table summarizes information about fixed stock options outstanding
at December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------- -----------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
Range of at Remaining Average at Average
Exercise December 31, Cont. Exercise December 31, Exercise
Prices 1997 Life Price 1997 Price
--------- ------------ ---------- -------- ------------ -------
<S> <C> <C> <C> <C> <C>
$6.80 230,000 10 $6.80 -- $ --
$7.20 1,339,710 10 $7.20 -- $ --
$8.00 63,000 10 $8.00 -- $ --
</TABLE>
10. EARNINGS PER SHARE:
Effective December 31, 1997, the Company adopted SFAS 128, Earnings Per Share.
SFAS 128 prescribes new calculations for Basic and Diluted Earnings Per Share
(EPS), which replaces the former calculations for Primary and Fully Diluted EPS.
Basic EPS is computed by dividing net income (loss) by the weighted average
shares outstanding; no dilution for any potentially dilutive securities is
included. Diluted EPS is calculated differently than the fully diluted EPS
calculation under the old rules. When applying the treasury stock method for
diluted EPS to compute dilution for options, SFAS 128 requires use of the
average share price for the period, rather than the greater of the average share
price or end-of-period share price. EPS is computed as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1996 1997
----------- ------------
<S> <C> <C>
EARNINGS:
Net income (loss) for
basic and diluted EPS $ (4,955) $ (3,706)
========= ==========
SHARES:
Weighted average
shares outstanding
for basis EPS 46,144 5,907,890
Stock option and
warrant dilution (1) - -
--------- ----------
Weighted average
shares for diluted
EPS 46,144 5,907,890
========== =========
Basic EPS (107.37) (0.63)
========== ==========
Diluted EPS (107.37) (0.63)
========== ==========
</TABLE>
(1) The effect of potential common stock equivalents is excluded from the
dilutive calculation for the year ended December 31, 1996 and 1997 as
their effect would be antidilutive.
<PAGE> 32
-9-
11. RETIREMENT PLANS:
PPI maintains several retirement plans for its employees. The various plans were
originally set up by The Founding clinics. Descriptions of the various plans as
of December 31, 1997 are as follows:
401(k) Profit Sharing Plan - Former Corvallis Employees
PPI has a 401(k) Profit-Sharing Plan (the 401(k) Plan) in which all former
Corvallis employees are eligible to participate subject to certain
eligibility criteria. The 401(k) Plan permits employees to contribute up to
10% of their annual compensation (not to exceed certain annual limits
imposed by the Internal Revenue Code). PPI is required to make matching
contributions equal to 50% of employee contributions up to 8% of the
employee's compensation. PPI may also make discretionary contributions. All
contributions are 100% vested.
Money-Purchase Pension Plan - Former Corvallis Employees
PPI has a Money-Purchase Pension Plan in which all former Corvallis
employees are eligible to participate subject to certain eligibility
criteria. PPI contributes 5.4% of the employee's eligible earnings up to $48
and 10.8% of eligible earnings in excess of $48. These contributions are
100% vested upon eligibility.
PPI's contributions for these plans for the year ended December 31, 1997,
were $620.
Deferred Compensation
The Corvallis Clinic, P.C. 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 while in
service with Corvallis are eligible to receive such deferred retirement
compensation. PPI assumed the liability as of February 1, 1997 in the
reorganization transaction.
401(k) Profit-Sharing Plan - Former Medford Employees
PPI has a 401(k) Profit-Sharing Plan (the 401(k) Plan) in which all former
Medford employees are eligible to participate subject to certain eligibility
criteria. The 401(k) Plan permits employees to contribute up to 15% of their
annual compensation (not to exceed certain annual limits imposed by the
Internal Revenue Service). PPI may also make discretionary contributions,
which are immediately 100% vested.
Money Purchase Pension Plans - Former Medford Employees
PPI also has a Money Purchase Pension Plan in which all former Medford
employees are eligible to participate subject to certain eligibility
criteria. PPI contributes 5.7% of the employee's eligible earnings up to $63
and 11.4% of eligible earnings in excess of limitations imposed by the
Internal Revenue Service. These contributions are 100% vested upon
eligibility.
PPI's contributions for these plan for the year ended December 31, 1997 were
$1,107.
<PAGE> 33
-10-
401(k) Plan - Former HealthFirst Employees
PPI has a 401(k) plan covering all former HealthFirst employees who are
eligible subject to certain requirements. Employees contribute between 2% to
10% of their annual compensation. PPI matches employee contributions at a
rate of 10% plus a discretionary percentage determined by the Board of
Directors. The contributions to the Plan were $122 in 1997.
Money Purchase Plans - Former HealthFirst Employees
PPI has a defined contribution money purchase plan which is a plan in which
all former HealthFirst employees are eligible to participate subject to
certain requirements. PPI contributes 3% of the employee's compensation for
the plan year.
Contributions in 1997 were $362.
Supplemental Pension Plan - Former HealthFirst Employees
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. HealthFirst had accrued $176 for the plan at
February 1, 1997. The accrual was assumed by PPI in the reorganization
transaction.
Bonus Compensation Plan - Former HealthFirst Shareholders
In February 1996, HealthFirst established a bonus compensation plan for
eligible Shareholders. Employees are vested after five years of employment
with credit for price service. A substantial portion of the employees were
fully vested as of December 31, 1996. The total payout of approximately
$5.25 million will be over a period of eight years. PPI 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. PPI assumed the liability at February
1, 1997. The amount accrued at December 31, 1997 is $3,357, of which $589 is
included in current liabilities and the remainder is included in deferred
compensation.
12. PROFESSIONAL LIABILITY:
PPI maintains a claims-made professional liability insurance policy for the
providers employed by the New PCs. The policy includes full prior act coverage
for claims incurred but not reported prior to February 1, 1997. The claims-made
policy has no deductible. Management feels the coverage limits are adequate to
cover any claims exposure. PPI accrues an estimate of the future liability for
claims incurred but not reported prior to the end of the accounting period.
13. COMMITMENTS AND CONTINGENCIES:
Legal Proceedings
PPI 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 PPI.
<PAGE> 34
-11-
Compliance with Rules and Regulations
The healthcare industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
healthcare program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations by healthcare
providers. Violations of these laws and regulations could result in expulsion
from government healthcare programs, together with the imposition of significant
fines and penalties, as well as significant repayments for patient services
previously billed. Management believes that PPI is in compliance with the fraud
and abuse regulations, as well as other applicable government laws and
regulations. Compliance with such laws and regulations can be subject to future
government review and interpretation, as well as regulatory actions unknown or
unasserted at this time.
Employment Agreements
Several officers of PPI have employment agreements which establish annual
compensation levels and also provide for an annual incentive bonuses. In the
event the officers are terminated by PPI without cause, they would be entitled
to termination benefits equivalent to one year of their base salary, and health
and disability insurance for one year.
14. TREASURY STOCK:
Six shareholders of the Old PCs exercised their dissenters rights under the
Oregon Business Corporation Act. Accordingly, they were entitled to receive the
fair value of the shares they owned. PPI repurchased the dissenters' shares for
an aggregate amount of $748.
15. PREFERRED REDEEMABLE STOCK:
PPI has authorized 50,000,000 shares of preferred stock, at $.01 par value. At
December 31, 1996 and 1997, there were 0 and 15,000 shares outstanding,
respectively.
On July 10, 1997, PPI and First Union Capital Partners, Inc. (First Union)
entered into the Preferred Stock and Warrant Purchase Agreement (the Purchase
agreement). Pursuant to the Purchase Agreement, First Union purchased from PPI,
for a total purchase price of $15 million (i) 15,000 shares of Series B
Cumulative Redeemable Preferred Stock of PPI (Preferred Shares) and (ii) a
Common Stock Purchase Warrant (the Warrant) to purchase up to 1,799,893 shares
(the Warrant Shares) of Class B Common Stock of PPI at an exercise price of $.01
per share. The Preferred Shares rank senior to all other classes of capital
stock of PPI as to liquidation, dividends, redemptions and any other payment of
distribution with respect to capital stock. Any portion of the Preferred Shares
may be redeemed at any time at a price equal to $1,000 per share plus accrued
and unpaid dividends, which accrue at the annual rate of 9%, provided that all
Preferred Shares must be redeemed by June 30, 2005 or earlier upon the
occurrence of certain enumerated events (including change in control of PPI,
public offering by PPI, failure of PPI to meet certain financial covenants or a
material breach under the Purchase Agreement).
The number of Warrant Shares that First Union may purchase under the Warrant may
be reduced to 687,919 shares if the Preferred Shares are redeemed in full by
June 30, 1998, to 942,784 if redeemed in full by June 30, 1999, and to 1,212,228
if redeemed in full by June 30, 2000. First Union has the right to sell to PPI
the Warrant and the Warrant Shares at a price equal to fair market value after
June 30, 2002 or, if earlier, upon the occurrence of certain enumerated events,
which events are similar to those that require PPI to redeem Preferred Shares in
full. First Union has certain demand, piggyback and other registration rights.
First Union and any subsequent holders of Preferred Shares, the Warrant and
Warrant Shares are prohibited from transferring such securities to any
competitor of PPI.
The warrant was valued at $6,115 at July 10, 1997. The value was based on
probability factors assigned to the various share amounts which may be issued
and the fair market value per share. The warrants and preferred stock are being
accreted up to their fair market value to the earliest potential redemption
date. At December 31, 1997 the value of the warrants approximates the
redemption value at June 30, 1998. The preferred stock was valued at $8,590 at
July 10, 1997. The preferred stock is being accreted up to its redemption value
of $15,000 by June 30, 1998. Accordingly, $3,205 of accretion has been charged
to Retained Earnings in 1997.
<PAGE> 35
-12-
16. RELATED PARTY TRANSACTIONS:
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, to be paid under an installment sale contract with a 20-year term.
HPLLC made a $1,000 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.
Gateway Properties LLC
Gateway Properties LLC (Gateway) is owned by several former shareholders of The
Suburban Medical Clinic, P.C. ("Suburban"). Throughout 1995, Suburban recorded
notes receivable for various payments made on behalf of Gateway. The note
receivable at December 31, 1997 was $94. The terms of the note include monthly
installments of principal and interest of $5 through August 1999 with interest
accruing at 7%. PPI assumed a capital lease to occupy a new clinic building
for a term expiring in August 2015.
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 PPI are
summarized below:
<TABLE>
<CAPTION>
Percent Carrying Value at
Investee Owned December 31, 1997
-------- ----- -----------------
<S> <C> <C>
Corvallis MRI 33% $ 254
HealthCare Partners, LLC 50% 749
------
$1,003
======
</TABLE>
Additional information regarding these investments is discussed below.
<PAGE> 36
-13-
Corvallis MRI:
Corvallis held a one-third interest in Corvallis MRI which was transferred to
PPI on February 1, 1997. Corvallis MRI is 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 Corvallis, another
partner, and operated by Corvallis Radiology, P.C., the third partner.
During 1997, payments to Corvallis MRI for services provided to Corvallis were
$156 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% membership interest in
the limited liability company. On February 1, 1997, Corvallis transferred their
membership interest in HealthCare Partners, LLC to PPI.
The net book value of assets and liabilities contributed by Corvallis was
$13,805 for buildings, land and construction in progress and $8,363 for related
debt. In addition, Corvallis received $2,734 in 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 (Note 16).
Concurrent with the formation of the limited liability company, Corvallis
entered into a lease agreement relating to buildings and properties which were
contributed to the limited liability company which was assumed by PPI in the
merger.
PPI has guaranteed approximately $6,100 of long-term debt associated with the
above joint venture.
<PAGE> 37
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 December 31, 1996 and 1997, and the
related statements of operations, accumulated deficit and cash flows for the
year ended November 30, 1995, the thirteen-month period ended December 31, 1996
and the year ended December 31, 1997. 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 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 The Corvallis Clinic, P.C. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the year ended November 30, 1995, the thirteen-month period ended
December 31, 1996, and the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
February 12, 1998
<PAGE> 38
THE CORVALLIS CLINIC, P.C.
BALANCE SHEETS - AS OF DECEMBER 31, 1996 AND 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 187 $ 1
Patient accounts receivable, net of allowances for contractual
discounts and uncollectible accounts of $2,544 at December 31,
1996 4,232 -
Healthcare and other receivables 2,089 -
Inventories of drugs and supplies 219 -
Prepaid expenses and deposits 196 -
Prepaid provider compensation - 804
------- ----
Total current assets 6,923 805
------- ----
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
and amortization of $9,220 at December 31, 1996 18,914 -
------- ----
OTHER ASSETS:
Investments in affiliates 654 -
------- ----
654 -
------- ----
Total assets $26,491 $805
======= ====
LIABILITIES, REDEEMABLE STOCK, COMMON STOCK AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt and capital and direct
financing lease obligations $ 899 $ -
Line of credit 3,330 -
Accounts payable and accrued expenses 1,748 -
Accrued healthcare costs 3,058 -
Accrued compensation and related expenses 1,114 -
Deferred revenue 339 -
------- ----
Total current liabilities 10,488 -
------- ----
PAYABLE TO PPI - 804
LONG-TERM DEBT, net of current portion 1,388 -
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of
current portion 13,959 -
DEFERRED COMPENSATION AND OTHER 1,755 -
COMMITMENTS AND CONTINGENCIES
REDEEMABLE STOCKS 6,959 -
COMMON STOCK, no par value; 500 shares authorized; 0 and 63 shares
issued and outstanding at December 31, 1996 and 1997, respectively - 1
ACCUMULATED DEFICIT (8,058) -
------- ----
Total liabilities, redeemable stock, common stock and
accumulated deficit $26,491 $805
======= ====
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 39
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1995, THE THIRTEEN MONTHS
ENDED DECEMBER 31, 1996 AND YEAR ENDED DECEMBER 31, 1997
(All dollar amounts are expressed in thousands, except earnings per share)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Fee-for-service, net $ 20,704 $ 22,452 $ 20,231
Prepaid healthcare, net 18,470 21,257 22,883
----------- ----------- ---------
Net revenues 39,174 43,709 43,114
Less- Provider compensation and benefits 13,209 11,419 10,269
----------- ----------- ---------
Net revenues less provider
compensation and benefits 25,965 32,290 32,845
----------- ----------- ---------
EXPENSES:
Clinic salaries, wages and benefits 12,579 15,620 13,604
Purchased medical services 4,717 6,183 6,402
Medical and office supplies 3,842 4,623 4,550
General and administrative expenses 3,560 3,315 3,190
Lease and rent expense 198 290 255
Provision for uncollectible accounts 1,768 1,270 1,079
Depreciation and amortization 1,115 1,690 1,604
Management fee - - 1,673
----------- ----------- ---------
Total operating expenses 27,779 32,991 32,357
----------- ----------- ---------
Operating income (loss) (1,814) (701) 488
OTHER INCOME (EXPENSE):
Interest income 66 46 72
Interest expense (1,223) (1,916) (1,798)
Equity in income of affiliates 232 301 376
Other 632 466 1,086
----------- ----------- ---------
Net income (loss) before provision
for income taxes (2,107) (1,804) 224
----------- ----------- ---------
PROVISION FOR INCOME TAXES - - -
----------- ----------- ---------
NET INCOME (LOSS) $(2,107) $(1,804) $ 224
=========== =========== =========
EARNINGS PER SHARE $(30,985.29) $(27,333.33) $3,555.56
=========== =========== =========
WEIGHTED AVERAGE SHARES OUTSTANDING 68 66 63
== == ==
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 40
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 1995, THE THIRTEEN MONTHS
ENDED DECEMBER 31, 1996 AND THE YEAR ENDED DECEMBER 31, 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,107) $(1,804) $ 224
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization 1,115 1,690 144
Equity in income of affiliates (232) (301) (29)
Equity in income of affiliate offset against
operating expenses - 69 -
Equity in income of affiliate offset against
interest expense (289) (547) (34)
Loss on sale of equity interest in affiliate - 18 -
Changes in operating assets and liabilities:
Patient accounts receivable, net 364 72 (179)
Healthcare and other receivables 426 (910) 252
Inventories of drugs and supplies 33 5 97
Prepaid expenses and deposits (72) 283 8
Prepaid provider compensation - - (804)
Other assets (66) 90 -
Accounts payable and accrued expenses 423 (440) (293)
Income taxes payable 32 (32) -
Payable to PPI - - 804
Accrued healthcare costs 799 1,777 (413)
Accrued compensation and related expenses (3,002) (794) 3
Deferred revenue 50 (58) -
Deferred compensation and other 140 125 (68)
------- ------- -------
Net cash used in operating activities (2,386) (757) (288)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,203) (1,070) (24)
Purchases of investments (123) - -
Cash distributions received from investments 400 615 -
Cash distributions received from sale of equity
interest in affiliate - 53 -
------- ------- -------
Net cash used in investing activities (2,926) (402) (24)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) from borrowings under line of
credit nt 1,409 1,921 (30)
Proceeds from issuance of long-term debt 1,200 1,400 -
Principal payments on long-term debt and direct
financing lease obligation (239) (674) (98)
Proceeds from issuance of common stock - 10 1
Payments for redemption of common stock (23) (123) -
Payments for redemption of preferred stock (19) (57) -
Proceeds from repayments of notes receivable from
stockholders 136 81 8
Cash received in formation of HealthCare Partners, LLC 2,734 - -
Costs incurred related to Physician Partners, Inc.
transaction - (1,389) (85)
Drafts payable assumed by Physician Partners, Inc.
in merger - - 330
------- ------- -------
Net cash provided by financing activities 5,198 1,169 126
------- ------- -------
</TABLE>
(continued)
<PAGE> 41
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED NOVEMBER 30, 1995, FOR THE THIRTEEN MONTHS
ENDED DECEMBER 31, 1996 AND THE YEAR ENDED DECEMBER 31, 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (114) $ 10 $ (186)
CASH AND CASH EQUIVALENTS, beginning of period 291 177 187
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period $ 177 $ 187 $ 1
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 891 $ 2,327 $ 2,164
Cash paid (received) for income taxes (42) 54 -
</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% ownership
interest in the new entity (Note 13).
Notes receivable from shareholders for purchase of stock during 1995 and 1996
were $23 and $13, respectively.
Corvallis received a noncash distribution from an affiliate during 1996 of
$69.
Redemption of common stock in exchange for a payable of $132 during 1996.
In February 1997, Corvallis assigned all assets and liabilities to PPI as
part of the reorganization and merger transaction. The book value of
Corvallis' assets and liabilities at the date of the transaction are
presented below:
<TABLE>
<S> <C>
Current assets $ 6,230
Property, plant and equipment 18,792
Other long-term assets 717
Current liabilities 9,691
Long-term liabilities 7,001
Contributed equity (953)
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 42
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF ACCUMULATED DEFICIT
FOR THE YEAR ENDED NOVEMBER 30, 1995, THE THIRTEEN MONTHS
ENDED DECEMBER 31, 1996 AND YEAR ENDED DECEMBER 31, 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<S> <C>
BALANCE, November 30, 1994 $ (459)
Accretion of common stock (778)
Net loss (2,107)
-------
BALANCE, November 30, 1995 (3,344)
Accretion of common stock (1,520)
Costs incurred related to Physician Partners, Inc. transaction (1,390)
Net loss (1,804)
-------
BALANCE, December 31, 1996 (8,058)
Net income 224
Transfer of ownership to Physician Partners, Inc., during merger
(Note 1) 7,834
-------
BALANCE, December 31, 1997 $ -
=======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 43
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(All dollar amounts are expressed in thousands)
1. BUSINESS AND ORGANIZATION:
The Corvallis Clinic, PC (Corvallis), an Oregon professional corporation, was
incorporated on September 18, 1996 under the name Physician Partners Corvallis,
PC for the purpose of effecting a reorganization transaction between Physician
Partners, Inc. (PPI) and three Oregon professional corporations (the Founding
Clinics).
This transaction, which was consummated on February 1, 1997, resulted 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 were spun off into newly formed professional corporations
(New PCs). Corvallis is one of the new PCs. The physician practice management
business, along with substantially all of the assets and liabilities of the
three Founding Clinics, i.e., cash, receivables, inventories, prepaids,
property, plant and equipment, other assets, payables, accruals, debt, and
certain contractual commitments were transferred to PPI. The New PCs are
responsible for providing medical services and the related costs for provider
compensation and benefits. The assets transferred to the New PCs, which had zero
carrying value, include the employment agreements between each Company and its
providers, certain provider contracts under which the New PCs will be receiving
fee-for-service compensation and patient medical records.
An integral part of the reorganization is a 40-year management agreement whereby
PPI provides physician practice management services to the New PCs. Services to
be provided include management and administrative services, capital resources,
facilities, equipment and supplies. As consideration, PPI is entitled to (a)
reimbursement of all managerial costs and expenses (Manager's Expenses) incurred
by PPI and (b) a management fee equal to 16% of (i) net revenues relating to
services provided by the New PCs less (ii) Manager's Expenses.
Essentially all of the cash remaining in the New PC after the payments to PPI
under the management agreement will fund the compensation and benefits of
providers employed by the New PCs.
Corvallis consists of approximately 83 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.
<PAGE> 44
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION:
Selected accounting policies are discussed below. Other significant accounting
policies regarding revenues, income taxes, professional liability, deferred
compensation and investments in affiliates are discussed in specific notes that
follow.
Change in Fiscal Year End
Effective December 1, 1995, Corvallis changed its fiscal year end from November
30 to December 31. Accordingly, the 1996 fiscal year ended December 31, includes
the results of operations for thirteen months.
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 commercial insurance, Medicare
and Medicaid. Corvallis manages credit risk with the various public and private
insurance providers, as deemed appropriate by management. Allowances for
contractual discounts and uncollectible accounts have been made for potential
losses, where appropriate.
Prepaid Provider Compensation
Prepaid provider compensation includes the amount paid to providers which are in
excess of the earned amount computed in accordance with the Management Agreement
(Note 1). The balance will be reversed in future years when the amount paid is
less than the earned amount.
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 the straight-line method over the shorter of the period
of the lease term or the estimated useful life of the equipment. Estimated lives
are as follows:
Building and building improvements 7-40 years
Furniture and equipment 5-15 years
Accrued Healthcare Costs
Accrued healthcare costs are calculated based on reported claims and an estimate
based on historical data of incurred but not reported claims. These accrued
healthcare cost estimates will vary from actual results and the differences may
be significant.
-2-
<PAGE> 45
Payable to PPI
Corvallis signed a note payable to PPI, bearing interest at 7.6%. Interest only
payments are due in 1998 and monthly installments of principal and interest
payments are due beginning January 1999 for three years.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, patient accounts receivable,
accounts payable and accrued expenses 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 estimate 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.
Notes Receivable from Stockholders
Corvallis maintains various agreements with stockholders for their purchase of
common stock. The notes bear interest at 6.52% and mature at various stages
through the year 2006.
Other Income
Other income includes a $600 one time payment from PPI. The payment was part of
a transition plan developed by PPI to assist Corvallis in its transition to the
Management Agreement.
Provider Compensation and Benefits
Provider compensation and benefits consist 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.
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.
Financial Statement Presentation
The accompanying financial statements reflect the assets and liabilities as of
December 31, 1996 and results of operations for the year ended November 30,
1995, the thirteen months ended December 31, 1996 for The Corvallis Clinic,
P.C. prior to the reorganization transaction ("Old Corvallis"). The Statement
of Operations and Cash Flows for the year ended December 31, 1997, include
results of operations for Old Corvallis from January 1 to January 31, 1997.
The remainder of the period represents the operations of The Corvallis Clinic,
P.C. ("New PC") subsequent to the effective date of the reorganization
transaction, February 1, 1997.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. REVENUES:
Corvallis reports its revenues according to two principal types of payment
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 delegated professional risk with limited
institutional risk based upon utilization parameters mutually agreed upon by
the hospital health plan and Corvallis.
-3-
<PAGE> 46
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.
Corvallis follows the policy of netting prepaid healthcare revenues and
purchased medical services expenses for the institutional portion of capitated
agreements. Liabilities associated with these contracts are included in accrued
healthcare costs in the accompanying financial statements. Corvallis' revenue
associated with these contracts was approximately $11,945, $16,699 and $16,235
for the year ended November 30, 1995, thirteen months ended December 31, 1996
and the year ended December 31, 1997, respectively.
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 13 Months Ended Year Ended
November 30, 1995 December 31, 1996 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Fee-for-service, gross $25,778 $28,801 $26,043
Contractual discounts (5,074) (6,349) (5,812)
------- ------- -------
Fee for service, net $20,704 $22,452 $20,231
======= ======= =======
</TABLE>
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 15%, 16% and 14% of net patient service revenues
were derived from services provided to fee-for-service Medicare patients
in 1995, 1996 and 1997, respectively.
Medicaid
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule.
Approximately 3%, 2% and 2% of net patient service revenues were derived
from services provided to fee-for-service Medicaid patients in 1995,
1996 and 1997, respectively.
-4-
<PAGE> 47
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
The following customers represented individually more than 10% of Corvallis' net
revenue as follows:
<TABLE>
<CAPTION>
Year Ended 13 Months Ended Year Ended
November 30, 1995 December 31, 1996 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Pacificare - Commercial 23% 21% 22%
PacifiCare - Secure Horizons 16 10 10
HMO Oregon - - 10
SelectCare 10 - -
Oregon Health Plan 11 - -
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Land and land improvements $ 667
Buildings and leasehold improvements 19,448
Furniture and equipment 8,019
-------
28,134
Less- Accumulated depreciation (9,220)
-------
$18,914
=======
</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.
-5-
<PAGE> 48
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 at December 31,
1996:
<TABLE>
<S> <C>
Deferred tax assets:
Cash to accrual adjustments $4,261
Net operating loss 832
Other 306
-------
Gross deferred tax assets 5,399
Less- Valuation allowance (1,778)
-------
Net deferred tax asset 3,621
Deferred tax liabilities:
Cash to accrual adjustments (3,621)
-------
Net deferred tax asset $ -
=======
</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 13 Months Ended Year Ended
November 30, 1995 December 31, 1996 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Federal tax at statutory rate $(716) $(604) $-
Add (deduct):
State income tax, net of federal
benefit (126) (107) -
Future tax benefits not recognized
849 699 -
Other (7) 12 -
----- ----- -----
Provision for income taxes $ - $ - $ -
===== ===== =====
</TABLE>
Nonrealized future tax benefits referred to above represent tax benefits related
to net operating loss (NOL) carryforwards. These benefits have not been
recognized in the accompanying financial statements because there is no
assurance these NOLs can be utilized in the future.
As of December 31, 1997, the net income before provision for income taxes
represents the results of operations for Old Corvallis from January 1 to January
31, 1997. The valuation reserve against the deferred tax assets was reversed in
an amount equal to the current tax expense, resulting in no tax provision being
reflected in the 1997 statement of operations. The operations of Corvallis for
the remainder of the period have resulted in no net income and, accordingly, no
current tax expense is necessary.
-6-
<PAGE> 49
6. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Note payable interest at 10%, payable in monthly installments of $31 through February
1999, secured by equipment $ 707
Note payable, interest at 9%, payable in monthly installments of $35 through August 2000,
secured by real equipment 1,304
------
Total long-term debt 2,011
Less- Current portion (623)
------
Long-term debt, net of current portion $1,388
======
</TABLE>
Lines of Credit
Corvallis maintained a revolving line-of-credit agreement with a bank providing
up to $2,500, secured by accounts receivable and inventory. At February 1, 1997,
the revolving line of credit was consolidated into a $7,500 line-of-credit as a
result of the reorganization transaction (Note 1).
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. The lease was assigned to PPI on February 1, 1997.
Lease equipment included in property, plant and equipment is as follows at
December 31, 1996:
<TABLE>
<S> <C>
Equipment $ 260
Less- Accumulated amortization (178)
-----
$ 82
=====
</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.
Direct Financing Lease Obligation
In June of 1995, Corvallis contributed land, buildings, construction in process
and related notes payable to HealthCare Partners, LLC (Note 13). 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 $184. 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 for cash received by Corvallis and obligations assumed by the LLC as
part of the transaction.
-7-
<PAGE> 50
The liability for this lease obligation was $14,142 at December 31, 1996 and was
assumed by PPI at February 1, 1997.
8. RETIREMENT PLANS:
401(k) Profit Sharing Plan
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 10% 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%
of employee contributions up to 8% of the employee's compensation. Corvallis may
also make discretionary contributions. Clinic contributions are 100% vested.
Money-Purchase Pension Plan
Corvallis also has a Money-Purchase Pension Plan in which all employees are
eligible to participate subject to certain eligibility criteria. Corvallis
contributes 5.4% of the employee's eligible earnings up to $48 and 10.8% of
eligible earnings in excess of $48. These contributions are 100% vested upon
eligibility.
Corvallis' contributions for these plans for the year ended November 30, 1995
and the 13-month period ended December 31, 1996 were approximately $2,010 and
$1,494, respectively.
9. PROFESSIONAL LIABILITY:
At February 1, 1997, Corvallis' professional liability insurance policy was
consolidated into a PPI policy as a result of the reorganization transaction
(Note 1). The consolidated claims-made policy has no deductible and includes
full prior acts coverage. Management believes the coverage is adequate to cover
any potential claims.
-8-
<PAGE> 51
10. 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 accounts for the period
November 30, 1995 through December 31, 1997, together with other information, is
presented below:
<TABLE>
<CAPTION>
Class A Class B Class C Notes
Voting Preferred Voting Common Nonvoting Preferred Receivable
---------------------------------- -------------------
Shares Carrying Shares Carrying Shares Carrying From
Issued Value Issued Value Issued Value Stockholders Total
------ ----- ------ ----- ------ ----- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, November 30, 1994 68 $1,358 12,035 $3,295 8,760 $876 $(742) $4,787
Stock issued 1 23 - - - - (23) -
Stock redeemed (1) (23) - - (190) (19) - (42)
Accretion - 6 - 772 - - - 778
Payments of notes - - - - - - 137 137
receivable
--- ------- ------- ------- ------ ----- ----- -------
BALANCE, November 30, 1995 68 1,364 12,035 4,067 8,570 857 (628) 5,660
Stock issued 1 23 - - - - (13) 10
Stock redeemed (5) (115) (235) (140) (570) (57) - (312)
Accretion - 79 - 1,441 - - - 1,520
Payments of notes - - - - - - 81 81
receivable
--- ------- ------- ------- ------ ----- ----- -------
BALANCE, December 31, 1996 64 1,351 11,800 5,368 8,000 800 (560) 6,959
Stock issued - - - - - - - -
Stock redeemed - - - - - - - -
Accretion - - - - - - - -
Payments of notes - - - - - - 8 8
receivable
PPI stock exchange (64) (1,351) (11,800) (5,368) (8,000) (800) 552 (6,967)
--- ------- ------- ------- ------ ----- ----- -------
BALANCE, December 31, 1997 - $ - - $ - - $ - $ - $ -
=== ======= ======= ======= ====== ===== ===== =======
</TABLE>
The carrying value of the Class A and Class B shares were being increased
(accreted) to the redemption price using the effective interest rate through the
earliest estimated redemption date. At February 1, 1997, Corvallis' stock was
exchanged for PPI stock.
In 1997, Corvallis issued 63 shares of no par value common stock with a total
value of $1.
11. 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 while in service with Corvallis are eligible to receive
such deferred retirement compensation. The deferred compensation recorded in the
accompanying financial statements is the net present value of the future
obligations recognized for the years of service.
12. COMMITMENTS AND CONTINGENCIES:
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.
Compliance with Rules and Regulations
The healthcare industry is subject to numerous laws and regulations of
federal, state and local governments. These laws and regulations include, but
are not necessarily limited to, matters such as licensure, accreditation,
government healthcare program participation requirements, reimbursement for
patient services and Medicare and Medicaid fraud and abuse. Recently,
government activity has increased with respect to investigations and
allegations concerning possible violations of fraud and abuse statutes and
regulations by healthcare providers. Violations of these laws and regulations
could result in expulsion from government healthcare programs, together with
the imposition of significant fines and penalties, as well as significant
repayments for patient services previously billed. Management believes that
Corvallis is in compliance with the fraud and abuse regulations as well as
other applicable government laws and regulations. Compliance with such laws and
regulations can be subject to future government review and interpretation as
well as regulatory actions unknown or unasserted at this time.
-9-
<PAGE> 52
Other Commitments
References of other commitments are made in the discussion of various lease
commitments and related debt guarantees in Notes 7 and 13.
13. 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>
Percent Carrying Value at
Investee Owned December 31, 1996
-------- ----- -----------------
<S> <C> <C>
Corvallis MRI 33% $218
HealthCare Partners, LLC 50 436
----
$654
====
</TABLE>
Additional information regarding these investments is discussed below.
Corvallis MRI:
Corvallis held a one-third interest in Corvallis MRI which was transferred to
PPI on February 1, 1997. The partnership was organized in 1988 and 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. Summarized financial information
of Corvallis MRI as of and for the year ended December 31, 1996 is presented
below:
<TABLE>
<S> <C>
Balance sheet data-
Current assets $ 461
Fixed assets 1,034
Other assets 40
------
Total assets $1,535
======
Current liabilities $ 400
Long-term debt 437
Other long-term liabilities 45
Partners' equity 653
------
Total liabilities and Partners' equity $1,535
======
</TABLE>
-10-
<PAGE> 53
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Operations data-
Revenues $1,657 $1,828
Operating expenses (834) (937)
Other income (expense) (83) (57)
------ ------
$740 $834
====== ======
</TABLE>
During 1995 and 1996, payments to Corvallis MRI for services provided to
Corvallis were $62 and $143, respectively, 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% membership interest in
the limited liability company. On February 1, 1997, Corvallis transferred their
membership interest in HealthCare Partners, LLC to PPI.
The net book value of assets and liabilities contributed by Corvallis was
$13,805 for buildings, land and construction in progress and $8,363 for related
debt. In addition, Corvallis received $2,734 in 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 (Note 7).
Summarized financial information of HealthCare Partners, LLC as of and for the
year ended December 31, 1996 is presented below:
<TABLE>
<S> <C>
Balance sheet data-
Current assets $ 336
Financing lease receivable 20,840
Property and improvements 3,356
Other assets 145
-------
Total assets $24,677
=======
Current liabilities $ 2,053
Long-term debt 7,843
Members' equity 14,781
-------
Total liabilities and Members' equity $24,677
=======
</TABLE>
-11-
<PAGE> 54
Operations data-
<TABLE>
<CAPTION>
Inception,
(June 1)
Through
December 31, December 31,
1995 1996
-------------- ----------
<S> <C> <C>
Revenues $1,258 $2,445
Expenses 680 1,604
------ ------
Net income $ 578 $ 841
====== ======
</TABLE>
Revenues include interest income of $1,149 for the period ended December 31,
1995 and $1,902 for the year ended December 31, 1996, relating to the financing
lease with Corvallis. As a substantial portion of the joint venture's income is
derived from payments made by Corvallis for this interest income, Corvallis'
share of earnings from the joint venture is offset against interest expense in
the accompanying statements of income.
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.
PPI has guaranteed approximately $6,100 of long-term debt associated with the
above joint venture.
Healthquest
During 1996, Corvallis' sold their interest in Healthquest to one of the other
partners. Corvallis recognized a loss on the sale of their investment of $18
included in the accompanying financial statements.
14. EARNING PER SHARE:
All share and per share data have been retroactively restated to give effect to
the recapitalization resulting from the transactions.
<PAGE> 55
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, 1996 and 1997, and
the related statements of operations, cash flows and stockholders' equity for
each of the years in the three-year period ended December 31, 1997. 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 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 Medford Clinic, P.C. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
February 13, 1998
<PAGE> 56
MEDFORD CLINIC, P.C.
BALANCE SHEETS - AS OF DECEMBER 31, 1996 AND 1997
(All dollar amounts are expressed in thousands)
ASSETS
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 201 $ 1
Patient accounts receivable, net of allowances for contractual discounts
and uncollectible accounts of $3,430 at December 31, 1996 6,124 -
Healthcare receivables 487 -
Inventories of drugs and supplies 203 -
Prepaid expenses and deposits 304 -
Restricted investments 250 -
------- ----
Total current assets 7,569 1
------- ----
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $5,303 at
December 31, 1996 5,701 -
------- ----
LONG-TERM DEFERRED TAX ASSET 77 -
------- ----
OTHER ASSETS:
Restricted investments 250 -
Other 44 -
------- ----
Total other assets 294 -
------- ----
Total assets $13,641 $ 1
======= ====
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,004 $ -
Drafts payable 530 -
Accounts payable 1,306 -
Income taxes payable 5 -
Accrued healthcare costs 1,027 -
Accrued compensation and related expenses 2,497 -
Current deferred tax liability 1,568 -
Total current liabilities ------- ----
7,937 -
LONG-TERM DEBT, net of current portion ------- ----
3,924 -
DEFERRED COMPENSATION AND OTHER LONG-TERM LIABILITIES ------- ----
938 -
COMMITMENTS AND CONTINGENCIES ------- ----
STOCKHOLDERS' EQUITY:
Common stock-
$10 stated value; 500 shares authorized; 57 and 0 shares outstanding at
December 31, 1996 and 1997,respectively 1 -
No par value; 500 shares authorized, 0 and 61 shares outstanding
at December 31, 1996 and 1997, respectively - 1
Additional paid-in capital 1 -
Retained earnings 840 -
------- ----
Total stockholders' equity 842 1
------- ----
Total liabilities and stockholders' equity $13,641 $ 1
======= ====
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 57
MEDFORD CLINIC, P.C.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts are expressed in thousands, except earnings per share)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Fee-for-service, net $33,951 $33,445 $37,167
Prepaid healthcare 5,015 6,996 9,886
------- ------- -------
Net revenues 38,966 40,441 47,053
Less- Provider compensation and benefits 11,239 12,202 11,157
------- ------- -------
Net revenue less provider compensation
and benefits 27,727 28,239 35,896
------- ------- -------
OPERATING EXPENSES:
Clinic salaries, wages and benefits 11,838 13,543 15,063
Purchased medical services 2,283 4,174 4,920
Medical and office supplies 5,578 5,909 6,431
General and administrative expenses 3,446 3,362 3,844
Provision for uncollectible accounts 868 1,069 1,349
Depreciation and amortization 1,125 966 1,108
Rent and lease expense 1,139 1,175 1,389
Management fee - - 1,891
------- ------- -------
Total operating expenses 26,277 30,198 35,995
------- ------- -------
Operating income (loss) 1,450 (1,959) (99)
OTHER INCOME (EXPENSE):
Interest income 97 104 56
Interest expense (487) (425) (334)
Other - - 331
------- ------- -------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES 1,060 (2,280) (46)
PROVISION (BENEFIT) FOR INCOME TAXES 408 (913) -
------- ------- -------
NET INCOME (LOSS) $ 652 $(1,367) $ (46)
======= ======= =======
EARNINGS PER SHARE $11,642.86 $(24,410.71) $(807.02)
========== =========== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 56 56 57
== == ==
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 58
MEDFORD CLINIC, P.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 652 $(1,367) $ (46)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization 1,125 966 98
Deferred taxes 347 (893) -
Changes in operating assets and liabilities:
Patient accounts receivable, net 426 557 (44)
Healthcare receivables 225 41 95
Inventories of drugs and supplies (62) 87 -
Prepaid expenses and deposits (235) 198 (33)
Other assets (34) 29 18
Drafts payable - 530 (529)
Accounts payable (56) 887 (181)
Income taxes payable 25 (20) -
Accrued healthcare costs 380 541 (13)
Accrued compensation and related expenses 129 406 461
Other liabilities (14) (189) -
Deferred compensation and other long-term
liabilities (27) 339 29
------- ------- ------
Net cash provided by (used in) operating
activities 2,881 2,112 (145)
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (865) (1,324) (21)
Purchases of restricted investments (1,207) (293) -
Proceeds from sale of short-term investments - 1,000 -
------- ------- ------
Net cash used in investing activities (2,072) (617) (21)
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of credit agreement - - 300
Repayments under line of credit agreement (350) - -
Proceeds from issuance of long-term debt 467 - -
Principal repayments of long-term debt (743) (935) (82)
Payments for redemption of common stock - (17) -
Proceeds from issuance of common stock - - 1
Cash contributed for Physician Partners, Inc. in merger - - (200)
Costs incurred related to Physician Partners, Inc.
transaction - (940) (53)
------- ------- ------
Net cash used in financing activities (626) (1,892) (34)
------- ------- ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 183 (397) (200)
CASH AND CASH EQUIVALENTS, beginning of year 415 598 201
------- ------- ------
CASH AND CASH EQUIVALENTS, end of year $ 598 $ 201 $ 1
======= ======= ======
</TABLE>
<PAGE> 59
MEDFORD CLINIC, P.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $492 $424 $330
Cash paid for income taxes 36 19 -
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In February 1997, Medford assigned all assets and liabilities to Physician
Partners, Inc. as part of the reorganization and merger transaction. The
book value of Medford's assets and liabilities, including $200 cash, at the
date of the transaction are presented below:
<TABLE>
<S> <C>
Current assets $7,300
Property, plant and equipment 5,625
Other long-term assets 603
Current liabilities 7,974
Long-term liabilities 4,811
Contributed equity 743
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 60
MEDFORD CLINIC, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
Common Stock
-----------------------------
$10 Stated
No Par Value Value
-------------- --------------
Number Number Additional
of of Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
------ ------ ------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,1994 - $ - 57 $ 1 $ 1 $ 2,512 $ 2,514
Issue of common stock - - 5 - - - -
Redemption of common stock - - (6) - - - -
Net income - - - - - 652 652
-- --- -- ---- ---- ------- -------
BALANCE, December 31, 1995 - - 56 1 1 3,164 3,166
Redemption of common stock - - (1) - - (17) (17)
Issuance of common stock - - 2 - - - -
Costs incurred
related to
Physician
Partners, Inc.
transaction - - - - - (940) (940)
Net loss - - - - - (1,367) (1,367)
-- --- -- ---- ---- ------- -------
BALANCE, December 31, 1996
- - 57 1 1 840 842
Issuance of common
stock 61 1 - - - - 1
Net loss - - - - - (46) (46)
Transfer of
ownership to
Physician
Partners, Inc. - - (57) (1) (1) (794) (796)
-- --- -- ---- ---- ------- -------
BALANCE, December 31, 1997 61 $ 1 - $ - $ - $ - $ 1
== === == ==== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 61
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS
(All dollar amounts are expressed in thousands)
1. BUSINESS AND ORGANIZATION:
The Medford Clinic, PC (Medford), an Oregon professional corporation, was
incorporated on September 18, 1996 under the name Physician Partners Medford,
PC, for the purpose of effecting a reorganization transaction between Physician
Partners, Inc. (PPI) and three Oregon professional corporations (the Founding
Clinics).
This transaction, consummated on February 1, 1997, resulted 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 were
spun off into newly formed professional corporations (New PCs). Medford is one
of the New PCs. The physician practice management business, along with
substantially all of the assets and liabilities of the three Founding Clinics,
i.e., cash, receivables, inventories, prepaids, property, plant and equipment,
other assets, payables, accruals, debt, and certain contractual commitments were
transferred to PPI. The New PCs are responsible for providing medical services
and the related costs for provider compensation and benefits. The assets
transferred to the New PCs, which had zero carrying value, include the
employment agreements between each Company and its providers, certain provider
contracts under which the New PCs will be receiving fee-for-service compensation
and patient medical records.
An integral part of the reorganization is a 40-year management agreement whereby
PPI provides physician practice management services to the New PCs. Services to
be provided include management and administrative services, capital resources,
facilities, equipment and supplies. As consideration, PPI is entitled to (a)
reimbursement of all managerial costs and expenses (Manager's Expenses) incurred
by PPI and (b) a management fee equal to 16% of (i) net revenues relating to
services provided by the New PCs less (ii) Manager's Expenses.
Essentially all of the cash remaining in the New PC after the payments to PPI
under the management agreement will fund the compensation and benefits of
providers employed by the New PCs.
Medford consists of approximately 75 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. 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 AND OTHER INFORMATION:
Selected accounting policies are discussed below. Other significant accounting
policies, regarding revenues, income taxes and professional liability are
discussed in specific notes that follow.
<PAGE> 62
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 commercial insurance, Medicare and
Medicaid. Medford manages credit risk with the various public and private
insurance providers, as deemed appropriate by management. Allowances for
contractual discounts and uncollectible 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 1995, 1996 and 1997.
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>
Restricted Investments
Under the agreements with Oregon Health Plan (OMAP) and Oregon Health Management
System (OHMS), Medford is required to maintain $250 in a restricted or
segregated account for each agreement. Medford can use these funds for purchased
medical services only with approval by OMAP or OHMS as appropriate. The
restriction for the OMAP agreement lapsed in 1997.
Accrued Healthcare Costs
Accrued healthcare costs are calculated based on reported claims and an estimate
based on historical data of incurred but not reported claims. These accrued
healthcare cost estimates will vary from actual results and the differences may
be significant.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments,
patient accounts receivable, restricted investments, accounts payable and
accrued liabilities are a reasonable estimate of their fair value based on the
short maturities of these instruments.
<PAGE> 63
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.
Other Income
Other income includes a $300 one time payment from PPI. The payment was part of
a transition plan developed by PPI to assist Medford in its transition to the
Management Agreement.
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.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Financial Statement Presentation
The accompanying financial statements reflect the assets and liabilities
as of December 31, 1996 and results of operations for the years
ended December 31, 1995 and 1996 for the Medford Clinic, P.C. prior to the
reorganization transaction ("Old Medford"). The Statement of Operations and
Cash Flows for the year ended December 31, 1997 include the results of
operations for Old Medford from January 1 to January 31, 1997. The remainder of
the period represents the operations of Medford Clinic, P.C. ("New PC")
subsequent to the effective date of the reorganization transaction, February 1,
1997.
3. REVENUES:
Medford reports its revenues according to two principal types of payment
methodologies as 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 delegated professional risk with limited
institutional risk based upon utilization parameters mutually agreed upon by
the hospital health plan and Medford.
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 costs in the accompanying
financial statements.
<PAGE> 64
Medford follows the policy of netting prepaid healthcare revenues and purchased
medical services expenses for the institutional portion of capitated agreements.
Liabilities associated with these contracts are included in accrued healthcare
costs in the accompanying financial statements. Medford's revenue associated
with these contracts was $553 and $2,233 for 1996 and 1997, respectively. There
was no revenue associated with these contracts for 1995.
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,
-------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Fee-for-service, gross $43,299 $45,465 $51,699
Contractual discounts (9,348) (12,020) (14,532)
------- ------- -------
Fee-for-service, net $33,951 $33,445 $37,167
======= ======= =======
</TABLE>
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 27%, 27% and 26% of net patient service revenues
were derived from services provided to fee-for-service Medicare patients
in 1995, 1996 and 1997, respectively.
Medicaid
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule.
Approximately 2%, 1% and 2% of net patient service revenues were derived
from services provided to fee-for-service Medicaid patients in 1995,
1996 and 1997, 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
The following customers represented individually more than 10% of Medford's
net revenue as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Blue Cross/Blue Shield of Oregon 16% 14% 12%
Oregon Health Plan - 12% 16%
</TABLE>
<PAGE> 65
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following as of December 31, 1996:
<TABLE>
<S> <C>
Land and land improvements $ 204
Buildings and leasehold improvements 2,167
Furniture and equipment 8,633
-------
11,004
Less- Accumulated depreciation (5,303)
-------
$ 5,701
=======
</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 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, 1996, Medford
had approximately $326 and $733 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 at December 31,
1996:
<TABLE>
<S> <C>
Deferred tax assets:
Cash to accrual adjustments $ 1,655
Net operating loss and credit carryforwards 294
Other 35
-------
Gross deferred tax assets 1,984
Less- Valuation allowance (293)
-------
Net deferred tax asset 1,691
Deferred tax liabilities:
Cash to accrual adjustments (2,946)
Property related book to tax differences (236)
-------
Gross deferred tax liabilities (3,182)
-------
Net deferred tax liability $(1,491)
=======
</TABLE>
<PAGE> 66
The net deferred tax liability is reflected in the accompanying balance sheet as
follows at December 31, 1996:
<TABLE>
<S> <C>
Current deferred tax liability $(1,568)
Long-term deferred tax asset 77
-------
$(1,491)
=======
</TABLE>
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1995 1996 1997
---- - ----- - ----
<S> <C> <C> <C>
Current:
Federal $ - $ 5 $ -
State 61 - -
Deferred:
Federal 304 (803) -
State 43 (115) -
---- ----- -----
$408 $(913) $ -
==== ===== =====
</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,
--------------------
1995 1996 1997
---- ----- ----
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate $371 $(771) $ -
Add (deduct):
State income tax (benefit), net of federal benefit 68 (142) -
Other (31) - -
---- ----- -----
Provision (benefit) for income taxes $408 $(913) $ -
==== ===== =====
</TABLE>
As of December 31, 1997, the net income before provision for income taxes
represents the results of operations for Old Medford from January 1 to January
31, 1997. The valuation reserve against the deferred tax assets was reversed in
an amount equal to the current tax benefit, resulting in no tax benefit being
reflected in the 1997 statement of operations. The operations of the New PC for
the remainder of the period have resulted in no net income and, accordingly, no
current tax expense is necessary.
<PAGE> 67
6. LONG-TERM DEBT:
Long-term debt at December 31, 1996 was as follows:
<TABLE>
<CAPTION>
<S> <C>
Equipment loan with bank, interest at 7.25%, payable in monthly installments of $22,
maturing April 2000, secured by equipment, furniture and fixtures and accounts
receivable $ 656
Note payable with title company, interest at 7.90%, payable in monthly
installments of $6, maturing July 1, 2013, secured by equipment and furniture
and fixtures 689
Equipment loan with bank, interest at 7.25%, payable in monthly installments of $26,
maturing June 1, 2002, secured by equipment, furniture and fixtures and accounts
receivable 1,384
Equipment loan with bank, interest at 7.75%, payable in monthly installments of
$45, maturing May 1, 1999, secured by equipment and accounts receivable 1,195
Facilities loan with bank, interest at 9.00%, payable in monthly installments of
$4, maturing September 30, 1999, secured by equipment, furniture and fixtures
and accounts receivable 108
Mortgage with bank, interest at 8.25%, payable in monthly installments of $5
maturing November 1, 2008, secured by first deed on real property and
equipment and furniture and fixtures 453
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 $2, maturing December 15, 2014, secured by first
deed on real property and equipment and furniture and fixtures 223
Mortgage with bank, interest at 8.25%, recalculated on a three year basis on a
predetermined interest rate formula, payable in monthly installments of $3,
maturing December 15, 2001, secured by second deed on real property and
equipment and furniture and fixtures 220
-------
Total long-term debt 4,928
Less- Current portion (1,004)
-------
Long-term debt, net of current portion $ 3,924
=======
</TABLE>
Medford maintained a revolving line-of-credit agreement with a bank providing up
to $500 secured by accounts receivable. The line-of-credit bore interest at the
lender's prime rate (8.5% at December 31, 1997) plus .25%.
At February 1, 1997, the long-term debt was assumed by Physician Partners, Inc.
and the $500 revolving line-of-credit was consolidated into a $7,500
line-of-credit as a result of the reorganization transaction (Note 1).
<PAGE> 68
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% of their annual
compensation (not to exceed certain annual limits imposed by the Internal
Revenue Service). Medford may also make discretionary contributions, which are
immediately 100% 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% of the employee's eligible earnings up to $63
and 11.4% of eligible earnings in excess of limitations imposed by the Internal
Revenue Service. These contributions are 100% vested upon eligibility.
Medford's contributions for these plans for the years ended December 31, 1995,
1996 and 1997 were $1,529, $1,656 and $0, respectively.
8. PROFESSIONAL LIABILITY:
At February 1, 1997, Medford's professional liability insurance policy was
consolidated into a Physician Partners, Inc. policy as a result of the
reorganization transaction (Note 1). The consolidated claims-made policy has no
deductible and includes full prior acts coverage. Management believes the
coverage is adequate to cover any potential claims.
9. COMMITMENTS AND CONTINGENCIES:
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.
Compliance with Rules and Regulations
The healthcare industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
healthcare program participation requirements, reimbursement for patient
services and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations
concerning possible violations of fraud and abuse statutes and regulations by
healthcare providers. Violations of these laws and regulations could result in
expulsion from government healthcare programs, together with the imposition of
significant fines and penalties, as well as significant repayments for patient
services previously billed. Management believes that Medford is in compliance
with the fraud and abuse regulations as well as other applicable government laws
and regulations. Compliance with such laws and regulations can be subject to
future government review and interpretation as well as regulatory actions
unknown or unasserted at this time.
10. EARNINGS PER SHARE:
All share and per share data have been retroactively restated to give effect to
the recapitalization resulting from the transactions.
<PAGE> 69
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, 1996 and 1997, and
the related statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997. 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 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 HealthFirst Medical Group, P.C.
as of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
February 20, 1998
<PAGE> 70
HEALTHFIRST MEDICAL GROUP, P.C.
BALANCE SHEETS - AS OF DECEMBER 31, 1996 AND 1997
(All dollar amounts expressed in thousands)
ASSETS
<TABLE>
<CAPTION>
1996 1997
------- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 895 $ 1
Patient accounts receivable, net of allowances for
contractual discounts and uncollectible accounts of
$2,465 at December 31, 1996 6,497 --
Healthcare and other receivables 2,848 --
Related party receivable 50 --
Income taxes receivable 58 --
Prepaid expenses and deposits 201 --
Prepaid provider compensation -- 3,175
------- ------
Total current assets 10,549 3,176
------- ------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
$5,769 at December 31, 1996 20,361 --
OTHER ASSETS -- --
------- ------
Total assets $30,910 $3,176
======= ======
</TABLE>
<PAGE> 71
HEALTHFIRST MEDICAL GROUP, P.C.
BALANCE SHEETS - AS OF DECEMBER 31, 1996 AND 1997 (CONTINUED)
(All dollar amounts expressed in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
1996 1997
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 1,500 $ --
Current portion of long-term debt and capital and direct
financing lease obligations 4,663 --
Accounts payable 2,123 --
Accrued expenses 703 --
Accrued healthcare costs 2,936 --
Accrued compensation and related expenses 3,313 --
Deferred revenue 182 --
-------- --------
Total current liabilities 15,420 --
-------- --------
PAYABLE TO PPI -- 3,175
LONG-TERM DEBT, net of current portion 5,066
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of current
portion 4,265 --
DEFERRED COMPENSATION AND OTHER LONG-TERM LIABILITIES 3,795 --
LONG-TERM DEFERRED TAX LIABILITY -- --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-
No par value; 1,000,000 shares authorized; 0 and 94 shares issued and
outstanding at December 31, 1996 and 1997,
respectively -- 1
Series 1 Class A--Voting; no par value; 800,000 shares
authorized; 7,000 and 0 shares issued and outstanding at
December 31, 1996 and 1997, respectively 700 --
Series 2 Class A--Voting; no par value; 200,000 shares
authorized; 2,200 and 0 shares issued and outstanding at
December 31, 1996 and 1997, respectively 330 --
Series 3, 4 and 5 Class A--Voting; no par value; 200,000,
100,000 and 100,000 shares authorized, none issued or
outstanding at December 31, 1996 and 1997 -- --
Class B--Nonvoting; no par value; 300,000 shares authorized;
0 shares issued and outstanding at December 31, 1996 and 1997 -- --
Additional paid-in capital 1,879 --
Retained earnings 1,149 --
Notes receivable from stockholders for purchase of stock (439) --
Unamortized value of restricted stock awards (1,255) --
-------- --------
Total stockholders' equity 2,364 1
-------- --------
Total liabilities and stockholders' equity $ 30,910 $ 3,176
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 72
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts expressed in thousands, except earnings (loss) per share)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Fee-for-service, net $ 22,834 $ 32,315 $ 35,575
Prepaid healthcare 14,818 27,800 30,055
-------- -------- --------
Net revenues 37,652 60,115 65,630
Less- Provider compensation and benefits 9,530 21,610 14,369
-------- -------- --------
Net revenue less provider compensation
and benefits 28,122 38,505 51,261
-------- -------- --------
OPERATING EXPENSES:
Clinic salaries, wages and benefits 11,737 18,157 18,496
Purchased medical services 4,253 9,812 10,545
Medical and office supplies 4,377 6,281 6,536
General and administrative expenses 4,491 5,115 6,248
Lease and rent expense 853 1,573 2,125
Provision for uncollectible accounts 1,146 1,911 2,056
Depreciation and amortization 736 1,567 2,055
Management fee -- -- 2,369
-------- -------- --------
Total operating expenses 27,593 44,416 50,430
-------- -------- --------
Operating income (loss) 529 (5,911) 831
OTHER INCOME (EXPENSE):
Interest income 39 100 428
Interest expense (189) (1,414) (1,625)
Other 121 1,211 624
-------- ---------- --------
Net income (loss) before provision
(benefit) for income taxes 500 (6,014) 258
-------- ---------- --------
PROVISION (BENEFIT) FOR INCOME TAXES 208 (1,899) --
-------- ---------- --------
NET INCOME (LOSS) $ 292 $ (4,115) $ 258
======== ========== ========
EARNINGS (LOSS) PER SHARE 5,509.43 (50,802.47) 2,866.67
======== ========== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 53 81 90
======== ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 73
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts expressed in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 292 $(4,115) $ 258
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization 736 1,567 148
Gain on sale of property, plant and equipment -- -- --
Provision for deferred income taxes 71 (1,936) --
Compensation expense recognized for provider
stock awards -- 502 --
Changes in operating assets and liabilities
(excluding assets and liabilities purchased
from Suburban):
Patient accounts receivable, net (1,020) (1,380) (178)
Healthcare and other receivables 568 301 691
Related party receivable -- 277 --
Income taxes receivable (168) 147 --
Inventories of drugs and supplies (16) 251 --
Prepaid expenses and deposits (79) 192 (50)
Prepaid provider compensation -- -- (3,175)
Other assets (50) 225 (169)
Drafts payable (1,579) (165) --
Accounts payable 461 431 (119)
Accrued expenses (39) 430 --
PPI payable -- -- 3,175
Income taxes payable (359) -- --
Accrued healthcare costs 92 984 (748)
Accrued compensation and related expenses 108 669 154
Deferred revenue 3 166 68
Deferred compensation and other long-term
liabilities 201 2,787 108
------- ------- -------
Net cash provided by (used in) operating activities
(778) 1,333 163
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (6,690) (3,181) (92)
Cash proceeds received from short-term investments 2,616 -- --
Cash received in acquisition of Suburban -- 231 --
------- ------- -------
Net cash used in investing activities (4,074) (2,950) (92)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 4,940 2,763 1,000
Proceeds from issuance of line of credit -- 1,500 --
Principal payments on long-term obligations (17) (998) (734)
Proceeds from repayments of notes receivable from
stockholders 62 64 17
Payments for redemption of common stock (10) (9) --
Cash received from direct financing lease obligations -- 1,000 --
Cash contributed to Physician Partners, Inc. in merger -- -- (1,158)
</TABLE>
<PAGE> 74
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts expressed in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES (Continued):
Proceeds from issuance of common stock $ -- $ -- $ 1
Costs incurred related to Physician Partners, Inc.
transaction -- (1,933) (91)
------ ------- -------
Net cash provided by (used in) financing activities
4,975 2,387 (965)
------ ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 123 770 (894)
CASH AND CASH EQUIVALENTS, beginning of year 2 125 895
------ ------- -------
CASH AND CASH EQUIVALENTS, end of year $ 125 $ 895 $ 1
====== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 186 $ 1,356 $ 1,620
Cash paid for income taxes 446 181 --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Notes receivable issued in exchange for common stock $ 80 $ 140 $ --
</TABLE>
In 1996, 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, including $231 of cash, and liabilities at the date of
acquisition are presented below:
<TABLE>
<S> <C>
Current assets $ 2,284
Property, plant and equipment 5,325
Other long-term assets 99
Current liabilities (2,833)
Long-term liabilities (4,617)
-------
Net equity acquired $ 258
=======
Reconciliation to equity accounts:
Common stock $ 330
Additional paid-in capital 122
Notes receivable from stockholders (194)
-------
$ 258
=======
</TABLE>
In February 1997, HealthFirst assigned all assets and liabilities to Physician
Partners, Inc. as part of the reorganization and merger transaction. The book
value of HealthFirst's assets and liabilities, including $1,200 of cash at the
date of the transaction are presented below:
<TABLE>
<S> <C>
Current assets $10,239
Property, plant and equipment 20,305
Other long-term assets 277
Current liabilities 11,112
Long-term liabilities 17,163
Contributed equity 2,546
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 75
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts expressed in thousands)
<TABLE>
<CAPTION>
Common Stock
----------------------------------------------------------------------
Series 1 Series 2
No Par Class A Class A
------------------- ------------------- -------------------
Number Number Number Additional
Of Of Of Paid-In
Shares Amount Shares Amount Shares Amount Capital
------- ------- ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 -- $ -- 4,950 $ 495 -- $-- $ --
Issuance of common stock -- -- 800 80 -- -- --
Redemption of common stock -- -- (100) (10) -- -- --
Repayment of notes receivable from
stockholders -- -- -- -- -- -- --
Net income -- -- -- -- -- -- --
------- ------- ------ ----- ------ ----- -------
BALANCE, December 31, 1995 -- -- 5,650 565 -- -- --
Notes receivable from stockholders
acquired from Suburban -- -- -- -- -- -- --
Common stock issued to acquire
Suburban -- -- -- -- 2,200 330 122
Issuance of common stock -- -- 1,400 140 -- -- 1,757
Redemption of common stock -- -- (50) (5) -- -- --
Repayment of notes receivable from
stockholders -- -- -- -- -- -- --
Costs related to Physician
Partners, Inc. transaction -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
------- ------- ------ ----- ------ ----- -------
BALANCE, December 31, 1996 -- -- 7,000 700 2,200 330 1,879
Issuance of common stock 94 1 -- -- -- -- --
Redemption of common stock -- -- -- -- -- -- --
Repayment of notes receivable from
stockholders -- -- -- -- -- -- --
Net income -- -- -- -- -- -- --
Transfer of ownership to Physician
Partners, Inc. during merger
(see Note 1) -- -- (7,000) (700) (2,200) (330) (1,879)
------- ------- ------ ----- ------ ----- -------
BALANCE, December 31, 1997 94 $ 1 -- $-- -- $-- $ --
======= ======= ====== ===== ====== ===== =======
</TABLE>
<TABLE>
<CAPTION>
Unamortized Notes
Value of Receivable
Restricted Retained From
Stock Awards Earnings Stockholders Total
------------ -------- ------------ -------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 $ -- $ 6,909 $(151) $ 7,253
Issuance of common stock -- -- (80) --
Redemption of common stock -- -- -- (10)
Repayment of notes receivable from
stockholders -- -- 62 62
Net income -- 292 -- 292
------- ------- ----- -------
BALANCE, December 31, 1995 -- 7,201 (169) 7,597
Notes receivable from stockholders
acquired from Suburban -- -- (194) (194)
Common stock issued to acquire
Suburban -- -- -- 452
Issuance of common stock (1,255) -- (140) 502
Redemption of common stock -- (4) -- (9)
Repayment of notes receivable from
stockholders -- -- 64 64
Costs related to Physician
Partners, Inc. transaction -- (1,933) -- (1,933)
Net loss -- (4,115) -- (4,115)
------- ------- ----- -------
BALANCE, December 31, 1996 (1,255) 1,149 (439) 2,364
Issuance of common stock -- -- -- 1
Redemption of common stock -- -- -- --
Repayment of notes receivable from
stockholders -- -- 17 17
Net income -- 258 -- 258
Transfer of ownership to Physician
Partners, Inc. during merger
(see Note 1) 1,255 (1,407) 422 (2,639)
------- ------- ----- -------
BALANCE, December 31, 1997 $ -- $ -- $ -- $ 1
======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 76
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
HealthFirst Medical Group, P.C. (HealthFirst), an Oregon professional
corporation, was incorporated on September 18, 1996 under the name Physician
Partners HealthFirst, PC for the purpose of effecting a reorganization
transaction between Physician Partners, Inc. (PPI) and three Oregon professional
corporations (the Founding Clinics).
This transaction, which was consummated on February 1, 1997, resulted 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 were spun off into newly formed professional corporations
(New PCs). HealthFirst is one of the new PCs. The physician practice management
business, along with substantially all of the assets and liabilities of the
three Founding Clinics, i.e., cash, receivables, inventories, prepaids,
property, plant and equipment, other assets, payables, accruals, debt, and
certain contractual commitments were transferred to PPI. The New PCs are
responsible for providing medical services and the related costs for provider
compensation and benefits. The assets transferred to the New PCs, which had zero
carrying value, include the employment agreements between each Company and its
providers, certain provider contracts under which the New PCs will be receiving
fee-for-service compensation and patient medical records.
An integral part of the reorganization is a 40-year management agreement whereby
PPI provides physician practice management services to the New PCs. Services to
be provided include management and administrative services, capital resources,
facilities, equipment and supplies. As consideration, PPI is entitled to (a)
reimbursement of all managerial costs and expenses (Manager's Expenses) incurred
by PPI and (b) a management fee equal to 16% of (i) net revenues relating to
services provided by the New PCs less (ii) Manager's Expenses.
Essentially all of the cash remaining in the New PC after the payments to PPI
under the management agreement will fund the compensation and benefits of
providers employed by the New PCs.
HealthFirst consists of approximately 159 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. A significant
change in the demographics of this area may have an adverse impact on the
business.
<PAGE> 77
-2-
The accompanying financial statements reflect the assets and liabilities as of
December 31, 1996 and results of operations for the years ended December 31,
1995 and 1996, for the HealthFirst Medical Group, P.C. prior to the
reorganization transaction (Old HealthFirst). The Statements of Operations and
Cash Flows for the year ended December 31, 1997 include the results of
operations for Old HealthFirst from January 1 to January 31, 1997. The
remainder of the period represents the operations of HealthFirst Medical Group,
P.C. (New PC) subsequent to the effective date of the reorganization
transaction, February 1, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION:
Selected accounting policies are discussed below. Other significant accounting
policies regarding revenues, income taxes, professional liability and deferred
compensation are discussed in specific notes that follow.
Cash Equivalents
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 commercial insurance, Medicare
and Medicaid. HealthFirst manages credit risk with the various public and
private insurance providers, as deemed appropriate by management. Allowances for
contractual discounts and uncollectible accounts have been made for potential
losses, where appropriate.
Prepaid Provider Compensation
Prepaid provider compensation includes the amount paid to providers that is in
excess of the earned amount computed in accordance with the Management Agreement
(Note 1). The balance will be reversed in future years when the amount paid is
less than the earned amount.
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.
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:
Buildings and leasehold improvements 7-45 years
Furniture and equipment 3-15 years
<PAGE> 78
-3-
Payable to PPI
HealthFirst signed a note payable to PPI, bearing interest at 7.6%. Interest
only monthly payments are due in 1998 and principal and interest monthly
payments are due beginning January 1999 for 36 months.
Accrued Healthcare Costs
Accrued healthcare costs are calculated based on reported claims and an estimate
based on historical data of incurred but not reported claims. These accrued
healthcare cost estimates may vary from actual results and the differences may
be significant.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents, patient accounts receivable, accounts
payable and accrued expenses 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.
Other Income
Other income includes a $600 one time payment from PPI. The payment was part of
a transition plan developed by PPI to assist HealthFirst in its transition to
the Management Agreement.
Financial Statement Presentation
The accompanying financial statements reflect the assets and liabilities as of
December 31, 1996 and results of operations for the year ended December 31, 1996
for the HealthFirst Medical Group, P.C. prior to the reorganization transaction
("Old HealthFirst"). The Statement of Operations and Cash Flows for the year
ended December 31,1997 include the results of operations for Old HealthFirst
from January 1 to January 31, 1997. The remainder of the period represents the
operations of HealthFirst Medical Group, P.C. ("New PC") subsequent to the
effective date of the reorganization transaction, February 1, 1997.
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.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. REVENUES:
HealthFirst reports its revenues according to two principal types of payment
methodologies as 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 delegated professional risk with limited
institutional risk based upon utilization parameters mutually agreed upon by
the hospital health plan and HealthFirst.
<PAGE> 79
-4-
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,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Fee-for-service, gross $29,384 $39,628 $47,415
Contractual discounts (6,550) (7,313) (11,840)
------- ------- -------
Fee-for-service, net $22,834 $32,315 $35,575
======= ======= =======
</TABLE>
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 8%, 6%, and 6% of net patient service revenues were derived
from services provided to fee-for-service Medicare patients in 1995, 1996
and 1997, respectively.
Medicaid
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule. Approximately
1% of net patient service revenues were derived from services provided to
fee-for-service Medicaid patients in 1995, 1996 and 1997.
Other Payors
HealthFirst has also entered into payment agreements with certain
commercial insurance carriers and preferred provider organizations. The
basis for payment to HealthFirst under these agreements includes
discounts from established charges.
<PAGE> 80
-5-
Major Customers
The following customers represented individually more than 10% of HealthFirst's
net revenue as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Pacificare - Secure Horizons 10% 12% 12%
Pacificare - Commercial 11 10 9
Blue Cross - HMO Oregon 16 12 12
Good Health Plan -- 11 12
Blue Cross - Commercial 10 -- --
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Land and land improvements $ 2,012
Buildings and leasehold improvements 14,756
Furniture and equipment 9,362
-------
26,130
Less- Accumulated depreciation (5,769)
-------
$20,361
=======
</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 HealthFirst
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.
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 at December 31,
1996:
<TABLE>
<S> <C>
Deferred tax assets:
Cash to accrual adjustments $ 4,570
Less- Valuation allowance (327)
-------
Net deferred tax asset 4,243
Deferred tax liabilities:
Cash to accrual adjustments (3,679)
Excess tax depreciation (564)
-------
Gross deferred tax liabilities (4,243)
-------
Net deferred tax asset $ --
=======
</TABLE>
<PAGE> 81
-6-
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------
1995 1996 1997
---- ------- -------
<S> <C> <C> <C>
Current:
Federal $119 $ -- $ --
State 17 -- --
--
Deferred: --
Federal 63 (1,614) --
State 9 (285) --
---- ------- -------
$208 $(1,899) $ --
==== ======= =======
</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>
December 31,
---------------------------
1995 1996 1997
---- ------- -------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate $175 $(2,105) $ --
Add (deduct):
State income tax (benefit), net of federal benefit 17 (301) --
Change in valuation allowance -- 328 --
Other 16 179 --
---- ------- -------
Provision (benefit) for income taxes $208 $(1,899) $ --
==== ======= =======
</TABLE>
In 1996, HealthFirst recognized a valuation allowance in an amount equal to its
net deferred tax assets of $328 because of uncertainty with respect to the
realization of the related tax benefits in future years.
As of December 31, 1997, the net income before provision for income taxes
represents the results of operations for Old HealthFirst from January 1 to
January 31, 1997. The valuation reserve against the deferred tax assets was
reversed in an amount equal to the current tax expense, resulting in no tax
provision being reflected in the 1997 statement of operations. The operations of
the New PC for the remainder of the period have resulted in no net income and,
accordingly, no current tax expense is necessary.
<PAGE> 82
-7-
6. LONG-TERM DEBT:
Long-term debt at December 31, 1996 is as follows:
<TABLE>
<S> <C>
Note payable, due in monthly installments of principal and interest of $16
through July 2000, with a final payment of $1,636, bearing interest at
9.875%. The note is secured by a first mortgage on land, buildings, and
improvements. $1,714
Note payable, due in monthly installments of principal and interest through
January 2002, bearing interest at 8.4%. The note is secured by inventory,
furniture, and equipment. 1,964
Construction loan payable, final payment of principal and interest due in
January 1997, bearing interest at prime plus 1% (8.25% at December 31,
1996). The note is secured by building and land. 3,706
Note payable, due in annual principal installments of $115 through August 2011,
bearing interest at 7.9%. 1,650
Note payable due in monthly installments of $8 including interest through October
2000, bearing interest at 8.75% 314
Note payable due in monthly installments of $7 plus interest through January 1999,
bearing interest at 9.875% 177
Note payable, related party, due in monthly installments of $1 including interest
through 1998, bearing interest at 6% 8
------
Total long-term debt 9,533
Less- Current portion 4,467
------
Long-term debt, net of current portion $5,066
======
</TABLE>
Management converted the construction loan to a mortgage loan in 1997, extending
the maturity of the loan to February 2017.
HealthFirst maintained a revolving line-of-credit agreement with a bank
providing up to $2,500, secured by inventory, accounts receivable and equipment.
The line-of-credit bore interest at the lender's prime rate (8.25% at December
31, 1996) plus .5% and matures April 30, 1997. At February 1, 1997, the
line-of-credit was consolidated into a $7,500 line-of-credit as a result of the
reorganization transaction (Note 1).
<PAGE> 83
-8-
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 (Note
12) for a term of 21 years. Leased capital assets included in property, plant
and equipment are as follows at December 31, 1996:
<TABLE>
<S> <C>
Buildings and leasehold improvements $3,574
Furniture and equipment 264
------
3,838
Less- Accumulated amortization (682)
-----
$3,156
======
</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.
Direct Financing Lease Obligation
In May 1996, HealthFirst sold three facilities to HealthFirst Properties LLC
(Note 12) under a sale/leaseback arrangement. The facilities were sold for
$12,550, of which $11,550 is due in the form of an 8% 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 $1,000 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 amount owed on the financing obligation at
December 31, 1996 was $929 of which $76 is due within one year. The lease has a
term of 20 years and requires minimum annual rental payments of $1,318 in
1998, 1999, 2000, 2001 and 2002 and $17,680 thereafter. The financing
obligation and lease payments were assumed by PPI at February 1, 1997.
8. EMPLOYEE BENEFIT PLANS:
Retirement Plans
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. No contributions to the Plan were made
in 1997, 1996 and 1995. HealthFirst does not foresee making contributions to the
profit sharing plan in the future.
<PAGE> 84
-9-
HealthFirst has a 401(k) plan covering all employees who are eligible subject to
certain requirements. Employees contribute between 2% to 10% of their annual
compensation. HealthFirst matches employee contributions at a rate of 10% plus a
discretionary percentage determined by the Board of Directors. The contributions
to the Plan were $69 and $110 in 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% of employees' compensation which does
not exceed the Social Security integration level ($62 at December 31, 1996),
plus a higher percentage of the amount in excess of the integration level for
the Plan year. Contributions in 1995 and 1996 were $1,133 and $1,523,
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 $176 for the plan at December 31, 1996.
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 requirements. 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 contribution for 1996
was $390.
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
December 31, 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 1996 was approximately $3,900, a
portion of which has been paid. The expense was recorded to provider
compensation and benefits. The amount accrued at December 31, 1996, is $3,502,
of which $502 is included in current liabilities and the remainder is included
in deferred compensation. The liability was assumed by PPI at February 1, 1997.
<PAGE> 85
-10-
9. PROFESSIONAL LIABILITY:
HealthFirst maintained a claims-made professional liability insurance policy.
At February 1, 1997, HealthFirst's professional liability insurance policy was
consolidated into a Physician Partners, Inc. policy as a result of the
reorganization transaction (Note 1). The consolidated claims-made policy has no
deductible and includes full prior acts coverage. Management believes the
coverage is adequate to cover any potential claims.
10. COMMITMENTS AND CONTINGENCIES:
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.
Compliance with Rules and Regulations
The healthcare industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
healthcare program participation requirements, reimbursement for patient
services and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations
concerning possible violations of fraud and abuse statutes and regulations by
healthcare providers. Violations of these laws and regulations could result in
expulsion from government healthcare programs, together with the imposition of
significant fines and penalties, as well as significant repayments for patient
services previously billed. Management believes that HealthFirst is in
compliance with the fraud and abuse regulations as well as other applicable
government laws and regulations. Compliance with such laws and regulations can
be subject to future government review and interpretation as well as regulatory
actions unknown or unasserted at this time.
11. EARNINGS PER SHARE:
All share and per share data have been retroactively restated to give effect to
the recapitalization resulting from the Transactions.
12. 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 was
accounted for under the equity method. In 1995, HealthFirst paid premiums to CHN
of $106 and CHN paid HealthFirst $622 in 1995 for claims. No premiums were paid
or received in 1996 or 1997. CHN was legally dissolved in 1996.
Northwest Physicians Alliance
In 1995, HealthFirst invested $52 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. The Alliance was legally dissolved in 1998.
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, to be paid under an installment sale contract with a 20-year term.
HPLLC made a $1,000 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.
<PAGE> 86
-11-
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 December 31, 1996 was
$144. The terms of the note include monthly installments of principal and
interest of $5 through August 1999 with interest accruing at 7%. HealthFirst has
signed a capital lease to occupy a new clinic building for a term expiring in
August 2015.
Stock Subscriptions
HealthFirst has notes receivable from certain stockholders for their purchase of
common stock. The notes mature at various stages through the year 2008.
Restricted Stock Awards
During 1996, HealthFirst sold shares of Series 1 Class A common stock to ten
providers at prices below their estimated fair value for accounting
purposes. The terms of the related Restricted Stock Agreements require
forfeiture of the stock unless the grantee remains employed by HealthFirst until
February 1, 2002.
The excess of the estimated fair value of the stock over the amount to be paid
of $1,756 is to be recognized as compensation expense. Of this amount, $502 and
$348 has been recognized as compensation expense in 1996 and 1997, respectively.
The remaining amount will be amortized ratably to income over the next
five years.
13. BUSINESS ACQUISITION:
On February 1, 1996, HealthFirst acquired all of the outstanding stock of
Suburban 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. Results of operations after the
acquisition date are included in the December 31, 1996 statement of operations.
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>
Year Ended
December 31,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
Net revenues less provider compensation and benefits $ 39,625 $ 39,364
Operating expenses (40,364) (45,452)
Other expenses, net (215) (92)
-------- --------
Net loss before income taxes (954) (6,180)
Benefit for income taxes 403 1,899
-------- --------
Net loss $ (551) $ (4,281)
======== ========
</TABLE>
<PAGE> 87
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information about the persons who serve
as Directors and Officers of PPI:
<TABLE>
<CAPTION>
Name Age Title Term
- ---- --- ----- ----
<S> <C> <C> <C> <C>
David M. Goldberg, M.H.A. 49 President and Chief July 2, 1996 to Present
Executive Officer, Director
Tim E. Dupell, C.P.A 35 Senior Vice President and January 28, 1998 to Present
Chief Financial Officer,
Director
Michael F. Bonazzola, M.D 47 Senior Vice President and January 28, 1998 to Present
Chief Medical Officer,
Director
Bruce E. Van Zee, M.D. 52 Chairman of the Board, July 2, 1996 to Present
Director
David H. Cutsforth, Jr. 50 Director July 2, 1996 to Present
M.D.
Russell A. Dow, M.D. 49 Director July 2, 1996 to Present
Douglas M. Mancino, Esq. 48 Director July 2, 1996 to Present
Dan Gregorie, M.D. 48 Director September 17, 1997 to Present
Mark Leavitt, M.D. 47 Director January 28, 1998 to Present
Frederick W. Eubank, II 34 Director July 15, 1997 to Present
Jon D. Ness. 41 Senior Vice President July 2, 1996 to Present
Ralph Prows, M.D. 47 Senior Vice President June 1, 1997 to Present
Kerry Barnett 40 Senior Vice President February 9, 1998 to Present
Jerald Erstgaard 49 Former Senior Vice President July 2, 1996 to August 20, 1997
</TABLE>
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 that 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 Old PCs 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.
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, Mr. Dupell held concurrent positions
in Finance, Operations and Risk Sharing Plans with Blue Cross/Blue Shield of
Oregon and
<PAGE> 88
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 PPI 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. When Dr. Bonazzola
became Medford Clinic's Medical Director in 1991, Medford Clinic grew 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.
BRUCE E. VAN ZEE, M.D. joined PPI as a founding member of the Board of Directors
in 1996. 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 PPI 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 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 PPI as a founding member of the Board of Directors
in 1996. 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.
DOUGLAS M. MANCINO, ESQ. joined PPI 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
<PAGE> 89
American College of Tax Counsel. Mr. Mancino also has served as a Director of
Health Systems International, Inc., including acting on its Compensation
Committee.
FREDERICK W. EUBANK, II joined PPI as a Director in 1997. Mr. Eubank a Bachelor
of Science degree in Business Administration from the Wake Forest University
School of Business in Accountancy in 1986. In 1993, Mr. Eubank graduated with
honors from the executive program at Duke University's Fuqua School of Business
where he earned a Master of Business Administration degree. Mr. Eubank joined
First Union Corporation in 1986 and was an Assistant Vice President in the
Specialized Industries Group before joining First Union Capital Partners in
1989.
DAN GREGORIE, M.D. joined PPI as a Director in 1997. Dr. Gregorie received his
undergraduate degree from Duke University and his medical degree from Tufts
University in Boston, Massachusetts. He completed his internship and residency
in Internal Medicine at Mount Auburn Hospital in Cambridge, Massachusetts.
Following his residency, Dr. Gregorie attended the Sloan School of Management at
MIT where he received his master's degree in management. Dr. Gregorie has served
as special assistant to the Medical Director of Georgetown University Community
Health Plan, Vice President and Associate Regional Medical Director of Capital
Area Permanente Medical Group and President, CEO and Regional Medical Director
of Northeast Permanente medical Group in Hartford, Connecticut. Since 1989, he
has been President, CEO and Chairman of the Board of ChoiceCare.
MARK LEAVITT, M.D., PH.D., joined PPI as a Director in 1997. Dr. Leavitt founded
MedicaLogic, Inc. in 1985 and has been its CEO since inception. From 1992 to
1994, Dr. Leavitt served as Medical Director of Information Systems for
Providence Health System. He practiced internal medicine full-time in Portland,
Oregon from 1982 to 1992. Dr. Leavitt holds a Bachelor's degree from the
University of Arizona, a Doctorate from Stanford University in Electronic
Engineering and a Doctorate from the University of Miami in Medicine. He is
Board Certified in Internal Medicine and Geriatrics. Dr. Leavitt served as
President of the Oregon Society of Internal Medicine from 1993 to 1994 and is a
member of the American Society of Internal Medicine, the American College of
Physicians and the Medical Informatics Association.
JON D. NESS joined PPI as a Senior Vice President in 1996 and concurrently
serves as Chief Executive Officer of Medford Clinic. Before employed 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 physician
multi-specialty clinic, from 1986 to 1989.
RALPH PROWS, M.D. joined PPI as a Senior Vice President and concurrently serves
as Chief Executive Officer of the Corvallis Clinic, PC Dr. Prows received his
medical degree from Tulane University and completed specialty training at
Ochsner Foundation Hospital in New Orleans. He is Board Certified in Internal
Medicine. Dr. Prows had been the Corvallis Clinic's Medical Director since 1993
and was responsible for physician recruitment, clinical quality assurance and
utilization management. Prior to joining the Corvallis Clinic, he served for
seven years as Senior Vice President for Medical Affairs for Central
Massachusetts Health Care, a 100,000 member non-profit health maintenance
organization. Dr. Prows has also served on the Board of Directors of the Unified
Medical Group Association (now the American Medical group Association).
KERRY BARNETT joined PPI as Senior Vice President in February 1998 and
concurrently serves as Chief Executive Officer of HealthFirst Medical Group, PC.
Mr. Barnett received an undergraduate degree from the University of Rochester in
New York in 1978 and received his Juris Doctor from Yale School of Law in 1987.
From 1990 to 1993, he was the Oregon governor's legal counsel and senior policy
advisor. From 1993 until the end of 1997, Mr. Barnett served as Director of the
Department of Consumer and Business Services, Insurance Commissioner and
Superintendent of Banking. In this capacity he had primary responsibility for
all aspects of Oregon's largest business regulatory agency.
JERALD W. ERSTGAARD was a Senior Vice President of PPI. He 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. Since February 1, 1996, at the time of the business combination of
Metropolitan and Suburban, Mr. Erstgaard held the administrative
<PAGE> 90
position of Chief Executive Officer of HealthFirst. During Mr. Erstgaard's
tenure, HealthFirst grew from an organization of 15 physicians to an entity with
approximately 120 physicians. In addition to his role in management at
HealthFirst, Mr. Erstgaard acted 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.
His employment with PPI ended in August 1997.
ITEM 11: EXECUTIVE COMPENSATION
The following table summarizes the annual and long-term compensation of the
Company's Chief Executive Officer and the six highest paid executive officers
for 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards
------------------------------- ------------------------
Other
Annual Restricted Securities All Other
Compen- Stock Underlying Compen-
Name and Principal Position Year Salary Bonus(2) sation($)(3) Awards($) Options(#)(4) sation(5)
- --------------------------- ---- ------ -------- ------------ --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
David Goldberg 1997 231,000 -- 12,000 -- 150,000 --
Chief Executive Officer 1996 -- -- -- 148,770 -- --
and Director 1995 -- -- -- -- -- --
Tim Dupell 1997 175,000 25,000 12,000 -- 100,000 15.245
Chief Financial Officer 1996 -- -- -- 148,770 -- --
and Director 1995 -- -- -- -- -- --
Michael Bonazzola, M.D. 1997 185,000 25,000 12,000 -- 102,210 14,667
Chief Medical Officer 1996 -- -- -- -- -- --
and Director 1995 -- -- -- -- -- --
Ralph Prows, M.D. 1997 158,000 10,000 -- -- 40,977 13,166
Senior Vice President 1996 -- -- -- -- -- --
1995 -- -- -- -- -- --
Jon Ness 1997 175,000 40,000 -- -- 35,000 --
Senior Vice President 1996 -- -- -- 148,770 -- --
1995 -- -- -- -- -- --
Jerald Erstgaard (1) 1997 132,000 -- -- -- 35,000 2,550
Senior Vice President 1996 -- -- -- -- -- --
1995 -- -- -- -- -- --
</TABLE>
(1) Jerald Erstgaard`s employment with PPI was terminated in August 1997.
Pursuant to the severance agreement, Mr. Erstgaard will continue to be paid
at an annual rate of $132,000 for 14 months following the termination date.
(2) Annual bonuses are earned and accrued during the fiscal years indicated and
paid in the following year.
(3) Amounts consist of an automobile allowance paid by the Company.
(4) This column sets forth the dollar value, as of the grant date, of restricted
stock awarded. The stock awards aggregating 108,000 were granted in October
1996 to four officers of the Company. These awards were initially subject to
a three-year vesting requirement. In the case of three of the officers, the
requirement has subsequently been eliminated. The fourth officer is no
longer employed, but will be entitled to retain the stock award as long as
the terms of his separation agreement are adhered to. David Goldberg, Tim
Dupell and Jon Ness were each rewarded 27,000 shares at an exercise price of
$5.51 per share. The estimated fair value of these awards in the aggregate
amount of $595,080 was recognized as compensation expense in 1996.
<PAGE> 91
(5) Amounts represent matching contributions from the New PC's defined
contribution plans to Tim Dupell and Ralph Prows from the Corvallis Clinic,
PC , to Michael Bonazzola from Medford Clinic, PC, and to Jerald Erstgaard
from HealthFirst Medical Group, PC
The following table sets forth information concerning options granted to the
named executive officers in 1997.
<TABLE>
<CAPTION>
Potential realizable value at
assumed annual rates of stock
Individual Grants price appreciation for option term
----------------------------------------------------------------------------------------
Number of Percent of
securities total
underlying options/ Exercise
Options/ SARS granted or base
SARS to employees price Expiration
Name granted(#) in fiscal year ($/share) date 0%($) 5%($) 10%($)
- ---- ---------- -------------- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
David Goldberg 50,000 3.1% $7.20 2/01/07 $40,000 $226,400 $573,700
100,000 6.1% $6.80 11/12/07 $120,000 $427,600 $1,083,700
Tim Dupell 35,000 2.1% $7.20 2/01/07 $28,000 $158,500 $401,600
65,000 4.0% $6.80 11/12/07 $78,000 $278,000 $704,400
Michael Bonazzola, M.D. 2,210 0.1% $7.20 2/01/07 $1,768 $10,000 $25,400
65,000 4.0% $6.80 11/12/07 $78,000 $278,000 $704,400
35,000 2.1% $7.20 2/01/07 $28,000 $158,500 $401,600
Ralph Prows, M.D. 35,000 2.1% $7.20 2/01/07 $28,000 $158,500 $401,600
5,977 0.4% $7.20 2/01/07 $4,782 $27,100 $68,600
Jon Ness 35,000 2.1% $7.20 2/01/07 $28,000 $158,500 $401,600
Jerald Erstgaard 35,000 2.1% $7.20 2/01/07 $28,000 $158,500 $401,600
</TABLE>
(1) The potential realizable values shown are based on the actual market price
of the options at grant date, $8.00 per share, and the indicated assumed
annual rates of appreciation compounded annually.
(2) Options granted in 1997 did not include stock appreciation rights ("SARs").
The Securities and Exchange Commission regulations require information as to the
potential realizable value of each of these options, assuming that the market
price of Company Common Stock appreciates in value from the date of grant to the
end of the option term at annual rates of zero, five and ten percent. The shares
granted above were issued at a below-market price, therefore, the potential
realizable values of the options granted at the assumed annual rates were based
on the actual market value of the stock options at grant date, $8.00 per share.
If zero appreciation occurs over the term of the options, the value of the
options granted is listed above under the column detailing a 0% appreciation.
The value is determined as the difference between the market price of the
options and the base price of those options granted.
Actual gains, if any, on stock option exercises and Company Common Stock
holdings will depend on overall market conditions and the future performance of
the Company and its Common Stock. There can be no assurance that the amounts
reflected in this table will be realized.
FISCAL YEAR END OPTION VALUES
PPI's common stock is not publicly traded, therefore, the basis of the option
valuation is the price of the Common stock as of July 10, 1997, the last date of
valuation in the year ending December 31, 1997. No options were exercised in
1997 by any named executive officer. The following table details information
concerning the value of unexercised stock options held by each named executive
officer. The value of the unexercised options reflect the increase in the
granted value of the Company's Common Stock on the date of the grant through the
last date of stock valuation on 7/10/97. As of July 10, 1997, PPI's Common Stock
was valued at $8.00 per share. The value actually
<PAGE> 92
realized upon the future exercise of options by the named executive officers
will depend on the value of the Company Common Stock at the time of exercise.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 OPTION VALUE
---------------------------------------------------------------------------
Number of Securities Underlying
Unexercised Options at Value of Unexercised In-the-Money
December 31, 1997 Options at December 31, 1997
---------------------------------------------------------------------------
Name Unexercisable Unexercisable
- ---- ------------- -------------
<S> <C> <C>
David Goldberg 150,000 $160,000
Tim Dupell 100,000 $106,000
Michael Bonazzola, M.D. 102,210 $107,768
Ralph Prows, M.D. 40,977 $32,782
Jon Ness 35,000 $28,000
Jerald Erstgaard (1) -- --
</TABLE>
(1) Jerald Erstgaard's employment with PPI was terminated on August 20, 1997.
According to the terms of Mr. Erstgaard's Separation and Release Agreement,
Mr. Erstgaard forfeited the right to purchase the 35,000 shares of PPI
Common Stock granted to him at that time.
DIRECTOR COMPENSATION
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 are entitled to receive $750 per
meeting attended for various committee purposes if the meeting is not held on a
date on which the Board holds a meeting. Furthermore, Directors may be
reimbursed for reasonable and actual out-of-pocket expenses incurred in
connection with their duties as Directors.
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.
CHANGE-IN-CONTROL ARRANGEMENTS
PPI has established the Physician Partners, Inc. Change In Control Plan (the
"Plan") to enable PPI to provide severance benefits to eligible executive or
management employees whose employment is terminated following a Change in
Control (as such term is defined in the Plan) of the Company. Pursuant to
agreements entered into under the Plan, David Goldberg, Tim Dupell, Michael
Bonazzola, Ralph Prows and Jon Ness are entitled to separation pay and benefits
following a change of control of PPI and the employee's subsequent termination
of employment with PPI unless such termination is voluntary 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 continues for three years from such date the agreement is executed and
automatically renews every three years from such 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) equals three years' annualized base salary and maximum
target bonus. In addition, upon the occurrence of an eligible termination, all
outstanding options to purchase PPI Common Stock will 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 Plan or any other plan or
arrangement would not be deductible by PPI for federal income tax purposes, then
the
<PAGE> 93
payments under the Plan and the employee's agreement will be
reduced as necessary to eliminate the disallowance of the deduction.
EMPLOYMENT AGREEMENTS
DAVID GOLDBERG entered into an agreement with the Company on September 19, 1996
to be employed as President and Chief Executive Officer of PPI for a term of
three years. From July 1, 1996 until February 1, 1997, i.e., the effective date
of the Merger ("Effective Time"), Mr. Goldberg was 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 options to purchase 150,000 shares
of PPI Common Stock. Pursuant to his employment agreement, on October 30, 1996,
Mr. Goldberg received a restricted stock award of 27,000 shares of PPI 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. The
obligations of PPI under the employment agreement with Mr. Goldberg are
guaranteed by the New PCs.
TIM DUPELL entered into an agreement with the Company on September 19, 1996 to
be 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 was
paid a base salary at an annual rate of $175,000; from and after the Effective
Time, Mr. Dupell has received options to purchase 100,000 shares of PPI
Common Stock. Pursuant to his employment agreement, on October 30, 1996 Mr.
Dupell received a restricted stock award for 27,000 shares of PPI 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. The
obligations of PPI under the employment agreement of Mr. Dupell are guaranteed
by the New PCs.
MICHAEL BONAZZOLA, M.D. entered into an agreement with the Company on September
19, 1996 to be employed as Senior Vice President and Chief Medical Officer of
PPI for a term of three years. On the Effective Date, Dr. Bonazzola received a
bonus award of $25,000. Commencing at the Effective Time, Dr. Bonazzola has been
paid a base salary at an annual rate of $190,000, and received options to
purchase 100,000 shares of PPI 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. The obligations of PPI under the employment
agreement of Dr. Bonazzola are guaranteed by the New PCs.
JON NESS entered into an agreement with the Company on September 19, 1996 to be
employed as Senior Vice President of PPI for a term of three years. Commencing
at the Effective Time, Mr. Ness has been paid a base salary at an annual rate of
$175,000 and received an option to purchase 35,000 shares of PPI Common Stock.
Pursuant to his employment agreement, Mr. Ness received on October 30, 1996 a
restricted stock award for 27,000 shares of PPI Common Stock. In the event Mr.
Ness' 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.
JERALD ERSTGAARD entered into an agreement with the Company on September 19,
1996 to be employed as Senior Vice President of PPI. Mr. Erstgaard's position
was voluntarily terminated as of August 20, 1997. Mr. Erstgaard's employment
agreement was for a term of three years. Commencing at the Effective Time, Mr.
Erstgaard was paid a base salary at an annual rate of $132,000 and at the time
of termination of Mr. Erstgaard employment with PPI, PPI agreed to provide the
following compensation and benefits to Mr. Erstgaard: For a period of 14 months
from the termination date, in addition to the salary which had been paid to him
for the month of August 1997, PPI will pay Mr. Erstgaard an the annual rate of
$132,000 as though Mr. Erstgaard's employment with PPI had continued, payable in
regular installments and subject to applicable withholding and deductions. In
addition, PPI agreed to provide Mr. Erstgaard with (a) medical, health and
accident and disability insurance and other benefits at the same coverage level
maintained for Erstgaard's benefit immediately prior to the termination, and (b)
participation in any 1997 and 1998 contribution that PPI makes on behalf of its
employees to any retirement or pension plan, with respect to severance payments
through October 19, 1998.
<PAGE> 94
KERRY BARNETT entered into an employment agreement on February 9, 1998 to be
employed as Senior Vice President of PPI for a term of three years. Kerry
Barnett assumed the responsibilities of Jerald Erstgaard. Mr. Barnett will be
paid a base salary at an annual rate of $158,000 with a potential annual bonus
of $32,000 and receive an option to purchase 10,000 shares of PPI Common Stock.
In the event that Mr. Barnett's employment is terminated without cause, he shall
receive his base salary and medical, health and accident and disability
insurance for a term of 6 months after the date of such termination.
RALPH PROWS, M.D. entered into an agreement with the Company on June 1, 1997 to
be employed as Senior Vice President of PPI for a term of three years. Mr. Prows
will be paid a base salary at an annual rate of $162,650 and receive an option
to purchase 35,000 shares of PPI Common Stock. In the event Mr. Prows'
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.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information concerning beneficial ownership of the Company
Common Stock as of March 30, 1998 by (i) each of the nominees and current
Directors, (ii) each of the named executive officers, (iii) all current
Directors and executive officers of the Company as a group, and (iv) all persons
known by the Company to be the beneficial owners of five percent or more of
Company Common Stock.
<TABLE>
<CAPTION>
Shares of Company
Common Stock
PPI Beneficially Owned Percent Outstanding
- --- ------------------ -------------------
<S> <C> <C>
David M. Goldberg, M.H.A.(1) 37,000 0.6%
Tim E. Dupell, C.P.A(1) 34,000 0.5%
Michael F. Bonazzola, M.D(1) 34,269 0.5%
Bruce E. Van Zee, M.D.(1) 27,269 0.4%
David H. Cutsforth, Jr. M.D.(1) 19,889 0.3%
Russell A. Dow, M.D. 30,631 0.5%
Douglas M. Mancino, Esq.(1) 28,500 0.4%
Dan Gregorie, M.D. -- --
Mark Leavitt, M.D. -- --
Jon D. Ness.(1) 34,000 0.5%
Ralph Prows, M.D.(1) 26,649 0.4%
Kerry Barnett -- --
All directors and executive officers
of the Company as a group (1) 272,207 4.2%
</TABLE>
- ----------------------------------------
(1) Includes shares which may be acquired on February 1, 1997 upon exercise of
stock options (10,000 shares for David Goldberg, 7,000 shares for Tim Dupell
and Jon Ness, 7,442 shares for Michael Bonazzola, M.D., 442 shares for Bruce
Van Zee, M.D., 1,135 shares for David Cutsworth, Jr., M.D., 1,500 shares for
Douglas Mancino, Esq. and 8,195 shares for Ralph Prows, M.D.). Holders
exercise neither voting nor investment power over unexercised option shares.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
<PAGE> 95
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements
The following financial statements of Physician Partners, Inc. are
included in Part II, Item 8 of this report:
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Public Accountants
Balance Sheets - December 31, 1996 and 1997
Statements of Operations - Years ended December 31, 1995, 1996 and 1997
Statements of Shareholders' Equity - Years ended December 31, 1995, 1996
and 1997
Statements of Cash Flows - Years ended December 31, 1995, 1996 and 1997
</TABLE>
(2) Financial Statement Schedules
None required.
(3) Exhibits
<TABLE>
<S> <C>
2.1* Amended and Restated Agreement and Plan of Reorganization and
Merger, dated as of September 19, 1996, as amended on November
4, 1996, November 29, 1996 and December 31, 1996, among
Physician Partners, Inc., The Corvallis Clinic, PC, HealthFirst
Medical Group, PC and Medford Clinic, PC
3.1** Amended and Restated Certificate of Incorporation of PPI
3.2** By-Laws of PPI
3.2 Certificate of Designation
4.1 Credit Agreement between PPI and United States National Bank of
Oregon dated February 1, 1997, as amended on March 7, 1997 and
August 25, 1997
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** Amended and Restated 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 Jon Ness
10.5 Employment Agreement, dated as of February 9, 1998 between PPI
and Kerry Barnett
10.6 Employment Agreement, dated as of June 1, 1997 between PPI and
Ralph Prows
10.7 Amended and Restated 1997 Stock Option Plan for Non-Employee
Directors of PPI dated November 12, 1997
10.10 Amended and Restated 1997 Stock Option Plan for Employees of PPI
dated November 12, 1997
10.11 Amended and Restated 1997 Stock Option Plan for Non- Employee
Providers Affiliated with PPI dated November 12, 1997
10.12** PPI Change in Control Plan, dated as of December 31, 1996
10.13 Preferred Stock and Warrant Purchase Agreement with First Union
Capital together with Common Stock Purchase Warrant and
Registration Rights Agreement
27 Financial Data Schedule
</TABLE>
- ---------------------
* Previously filed connection with Registration Statement No. 333-15595 and
hereby incorporated by reference
** Previously filed and hereby incorporated by reference
<PAGE> 1
EXHIBIT 3.2
PHYSICIAN PARTNERS, INC.
CERTIFICATE OF DESIGNATION
OF SERIES B CUMULATIVE REDEEMABLE PREFERRED STOCK
SETTING FORTH THE POWERS, PREFERENCES, RIGHTS,
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF
SUCH SERIES OF PREFERRED STOCK
Pursuant to Section 151 of the Delaware General Corporation Law (the
"Delaware Code"), Physician Partners, Inc., a Delaware corporation (the
"Corporation"), DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors of
the Corporation by the Amended and Restated Certificate of Incorporation (as
amended, the "Certificate of Incorporation") of the Corporation, the Board of
Directors of the Corporation on July 7, 1997 duly adopted the following
resolution creating a series of Preferred Stock designated as the Series B
Cumulative Redeemable Preferred Stock and such resolution has not been modified
and is in full force and effect on the date hereof:
RESOLVED that, pursuant to the authority vested in the Board of
Directors of the Corporation in accordance with the provisions of the
Certificate of Incorporation of the Corporation, there hereby is created, out of
the 50,000,000 shares of preferred stock, par value $.01 per share, of the
Corporation authorized in Article IV of the Certificate of Incorporation (the
"Preferred Stock"), a series of Preferred Stock consisting of 15,000 shares,
which series shall have the following designation, powers, preferences and
relative, participating, optional or other special rights, and the following
qualifications, limitations and restrictions:
Section 1. Designation and Number of Shares.
(a) There shall be hereby established a series of Preferred Stock
designated as "Series B Cumulative Redeemable Preferred Stock" (the "Series B
Preferred Stock"). The authorized number of shares of Series B Preferred Stock
shall be 15,000.
(b) Capitalized terms used herein and not otherwise defined shall have
the meaning set forth in Section 13 below.
Section 2. Rank. The Series B Preferred Stock shall, with respect to the
payment of dividends, redemption rights, and the distribution of assets upon the
occurrence of the voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Corporation or any other payment or distribution with
respect to the Capital Stock of the Corporation, rank senior to (i) all shares
of Common Stock, par value $.01 per share, of the Corporation (the "Common
Stock"), (ii) all shares of Series A Junior Participating Preferred Stock, par
value $.01 per share, of the Corporation, and (iii) all shares of each other
class or series of Capital Stock of the Corporation hereafter created which does
not expressly rank pari passu with or senior to the Series B Preferred Stock
(the securities described in the foregoing clauses (i), (ii) and (iii) are
defined for purposes of this Certification of Designation as the "Junior
Securities").
<PAGE> 2
Section 3. Series B Liquidation Preference.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, the holders of
shares of Series B Preferred Stock then outstanding shall be entitled to be paid
for each share of Series B Preferred Stock held thereby, out of the assets of
the Corporation available for distribution to its stockholders, before any
payment or distribution of assets to the holders of any Junior Securities, an
amount (the "Series B Liquidation Amount") in cash equal to (i) $1,000 per share
(the "Series B Liquidation Preference") (subject to adjustment for any
combinations, consolidations, stock distributions or stock dividends with
respect to such shares) plus (ii) all accrued and unpaid dividends thereon
(whether or not earned, declared, or yet payable) to the date fixed for payment
of the Series B Liquidation Amount in such voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation (or, if funds
sufficient for such payment are not available from and after the date fixed for
such payment until such payment is made, to the date such payment is actually
made). Except as provided in the preceding sentence, holders of shares of Series
B Preferred Stock shall not be entitled to any other payment or distribution in
the event of any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Corporation. If the assets of the Corporation are not
sufficient to pay in full the foregoing Series B Liquidation Amount to the
holders of outstanding shares of the Series B Preferred Stock then the holders
of all shares of Series B Preferred Stock shall share ratably, in accordance
with the shares of Series B Preferred Stock held by them, and to the exclusion
of all holders of Junior Securities, in the assets available for distribution to
the stockholders of the Corporation in such voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation.
(b) After the holders of all shares of Series B Preferred Stock shall
have been paid in full the amounts to which they are entitled under Section
3(a), the remaining net assets of the Corporation shall be distributed to the
holders of Junior Securities in accordance with the Certificate of
Incorporation. Written notice of the voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, stating a payment
date, the Series B Liquidation Amount and the place where such Series B
Liquidation Amount shall be payable, shall be delivered in person, mailed by
certified or registered mail, return receipt requested, mailed by overnight mail
or sent by telecopier, not less than ten (10) days prior to the payment date
stated therein, to the holders of record of the Series B Preferred Stock, such
notice to be addressed to each such holder at its address as shown by the
records of the Corporation.
Section 4. Dividends.
(a) On the last day of March, June, September and December of each year
(each such date being referred to herein as a "Series B Quarterly Dividend
Date"), beginning on the first Series B Quarterly Dividend Date following the
date on which Series B Preferred Stock is first issued (the "Series B Issue
Date"), the holders of shares of Series B Preferred Stock, in preference to the
holders of Junior Securities, shall be entitled to receive out of the assets of
the Corporation legally available therefor, dividends on the Series B Preferred
Stock at an annual rate of 9.0%, subject to increase as provided in Section 4(b)
(the "Series B Coupon Rate"), on the sum of (i) the Series B Liquidation
Preference thereof plus (ii) all or any part of any accrued dividends thereon
that were payable but unpaid on any previous Series B Quarterly Dividend Date
("Dividend Arrearages"), whether or not such nonpayment was permitted hereby.
Such dividends shall be calculated on the basis of a 365-day year, shall be
cumulative and shall accrue, whether or not earned or declared, each day that
the Series B Preferred Stock or any Dividend Arrearage is outstanding and shall
be payable in cash in arrears on each Series B Quarterly Dividend Date, in
immediately available funds. The Board of Directors shall take all such actions
as shall be necessary or proper to declare and pay the dividends on the Series B
Preferred Stock as and when required by this Section 4. Notwithstanding any of
the foregoing provisions of this Section 4(a), for any Series B Quarterly
Dividend Date prior to the last day of June, 2002, the Board of Directors may
elect not to declare or pay in cash the dividends on the Series B Preferred
Stock otherwise payable on such Series B Quarterly Dividend Date, whereupon the
amount of
<PAGE> 3
such unpaid dividend shall be a Dividend Arrearage to which the Series B Coupon
Rate will apply for purposes of determining the dividends accruing after such
Series B Quarterly Dividend Date. The Board of Directors may fix in advance a
record date for the determination of holders of shares of Series B Preferred
Stock entitled to receive payment of a dividend thereon, which record date shall
be no more than sixty (60) days or less than ten (10) days prior to the date
fixed for the payment thereof.
(b) If the Corporation (each of the following is referred to hereinafter
as a "Default"): (i) on or after the last day of June, 2002, fails to declare or
pay dividends on the Series B Preferred Stock as set forth in Section 4(a)
hereof on any Series B Quarterly Dividend Date and such failure is continuing
for five (5) days after written notice thereof given to the Corporation by any
holder of Series B Preferred Stock; or (ii) fails to redeem all of the Series B
Preferred Stock on the Mandatory Redemption Date in accordance with Section
5(a); or (iii) fails to redeem in accordance with Section 6 all of the shares of
any holder of the Series B Preferred Stock to be redeemed upon such holder's
exercise of the Series B Elective Redemption pursuant to Section 5(b); or (iv)
(x) commences any case, proceeding or other action under any existing or future
law of any jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, reorganization or relief of debtors, seeking to have an order for
relief entered with respect to it, or seeking to adjudicate it bankrupt or
insolvent, or seeking reorganization, composition, extension or other such
relief with respect to it or its debts, or seeking appointment of a receiver,
trustee, custodian or other similar official for all or substantially all of its
assets (a "Bankruptcy Action"), (y) becomes the debtor named in any Bankruptcy
Action which results in the entry of an order for relief or any such
adjudication or appointment remains undismissed or undischarged for a period of
ninety (90) days or (z) makes a general assignment for the benefit of his
creditors; or (v) fails to comply with Section 7(c), or (vi) fails to comply in
all material respects with any of the terms or covenants contained in the
Purchase Agreement or any representation or warranty contained in the Purchase
Agreement fails to be true in all material respects when made or deemed made and
in either case, such failure continues uncured for a period of thirty (30) days
from the earlier to occur of (x) written notice from a holder of the Series B
Preferred Stock specifying such failure and requesting that it be cured or (y)
an executive officer of the Corporation becoming aware of such failure, then, in
addition to any rights or remedies provided herein or at law or in equity to the
holders of the Series B Preferred Stock, the Series B Coupon Rate with respect
to dividends accruing from and after the date of such Default shall be increased
to 13% per annum. Such increase in the Series B Coupon Rate shall continue in
effect until such time as the Corporation cures such Default, at which time the
Series B Coupon Rate with respect to dividends accruing from and after the date
of such cure shall be reduced to 9.0% per annum.
Section 5. Redemption.
(a) On June 30, 2005 (the "Mandatory Redemption Date"), the Corporation
shall redeem, out of funds legally available therefor, all of the issued and
outstanding shares of Series B Preferred Stock at a cash price per share (the
"Series B Mandatory Redemption Price") equal to (i) the Series B Liquidation
Preference plus (ii) all accrued and unpaid dividends thereon, whether or not
earned, declared or payable, to the Mandatory Redemption Date (or, if funds
sufficient for such payment are not available for such payment from and after
the Mandatory Redemption Date until such payment is made, to the date such
payment is actually made), in immediately available funds.
(b) Upon the occurrence of any Series B Elective Redemption Event (as
defined in Section 6(a)) and at the written election of any holder of Series B
Preferred Stock (in accordance with Section 6(b)), each holder of Series B
Preferred Stock shall have the right and option to require (the "Series B
Elective Redemption") the Corporation to purchase and redeem, out of funds
legally available therefor, all (but not less than all) of such holder's shares
of Series B Preferred Stock at a cash purchase price (the "Series B Elective
Redemption Price") per share equal to (i) the Series B Liquidation Preference
plus (ii) all accrued and unpaid dividends thereon, whether or not earned,
declared or payable, to the date of redemption (or, if
<PAGE> 4
funds sufficient for such payment are not available for such payment from and
after the redemption date until such payment is made, to the date such payment
is actually made), in immediately available funds.
(c) The Corporation also shall have the right, at its sole option and
election, at any time or from time to time prior to the Mandatory Redemption
Date, to redeem the shares of Series B Preferred Stock, in whole or in part, on
not less than five (5) Business Days' notice of the date of redemption (any such
date a "Series B Optional Redemption Date") at a cash price per share (the
"Series B Optional Redemption Price") equal to (i) the Series B Liquidation
Preference plus (ii) all accrued and unpaid dividends thereon, whether or not
earned, declared or payable, to the applicable Series B Optional Redemption Date
(or, if funds sufficient for such payment are not available for such payment
from and after the applicable Series B Optional Redemption Date until such
payment is made, to the date such payment is actually made), in immediately
available funds. If the Corporation elects to redeem less than all of the shares
of Series B Preferred Stock pursuant to this Section 5(c), then the shares to be
so redeemed shall be allocated among the holders of the Series B Preferred Stock
on a pro rata basis in accordance with the respective numbers of shares of
Series B Preferred Stock held by them of record on the applicable Series B
Optional Redemption Date.
(d) Written notice of any redemption of shares of Series B Preferred
Stock pursuant to Section 5(c) shall be delivered by the Corporation in person,
mailed by certified or registered mail, return receipt requested, mailed by
overnight mail or sent by telecopier, to the holders of record of the Series B
Preferred Stock, such notice to be addressed to each such holder at its address
as shown by the records of the Corporation. In order to facilitate the
redemption of shares of Series B Preferred Stock, the Board of Directors may fix
in advance a record date for the determination of the holders of Series B
Preferred Stock entitled to receive such notice of redemption, which date shall
be not more than fifteen (15) nor less than five (5) Business Days prior to the
date fixed for such redemption, and notice to any such record holder as of the
record date shall be effective as notice to any subsequent record holder.
(e) On the Mandatory Redemption Date or the Series B Optional Redemption
Date, as the case may be, the Corporation shall set aside in trust for the
benefit of the holders of shares of Series B Preferred Stock to be redeemed the
funds necessary for such redemption, which funds shall be used to pay the Series
B Mandatory Redemption Price or the Series B Optional Redemption Price, as the
case may be, for such shares upon the surrender of the certificates therefor to
the Corporation for such redemption (or such affidavits, indemnity and
undertakings as would be necessary to replace any certificate claimed to have
been lost, stolen or destroyed).
(f) If notice of redemption (in the case of optional redemption pursuant
to Section 5(c)) has been duly given as aforesaid, and if there has been set
aside on the Mandatory Redemption Date or the Series B Optional Redemption Date,
as the case may be, sufficient funds pursuant to Section 5(e) for payment of the
Series B Mandatory Redemption Price or Series B Optional Redemption Price, as
the case may be, payable in respect of shares of Series B Preferred Stock to be
redeemed pursuant to Section 5(a) or Section 5(c), and while such funds remain
available for such payment upon surrender of the certificates for such shares
for cancellation, then from and after the Mandatory Redemption Date or the
Series B Optional Redemption Date, as the case may be, (i) the shares to be so
redeemed shall no longer be deemed outstanding, (ii) the rights to receive
dividends thereon shall cease to accrue, and (iii) all other rights with respect
to such shares (other than the right to receive payment of the Series B
Mandatory Redemption Price or the Series B Optional Redemption Price, as the
case may be, against surrender of the certificates therefor) shall cease and
terminate; provided, that if the Corporation shall default in the payment of any
portion of the Mandatory Redemption Price or the Series B Optional Redemption
Price, as the case may be, then, in addition to any other rights and remedies of
the holders of shares of Series B Preferred Stock which may be available herein
or at law or in equity, the shares of Series B Preferred Stock that were to be
redeemed by such portion shall be deemed to have continued to be outstanding,
dividends shall have continued to accrue
<PAGE> 5
thereon, and the holders thereof shall have all of the rights of a holder of
Series B Preferred Stock, until such time as such default shall no longer be
continuing.
Section 6. Series B Elective Redemption Events; Notices; Procedures.
(a) Each event set forth below in this Section 6(a) shall constitute a
"Series B Elective Redemption Event" for purposes of a Series B Elective
Redemption pursuant to Section 5(b):
(i) a Change in Control of the Corporation; or
(ii) the voluntary sale, conveyance, exchange or transfer to
another Person of all or substantially all of the assets of the Corporation; or
(iii) a Public Offering; or
(iv) the assumption, incurrence or creation of any Debt by, or on
behalf of, the Corporation or its Subsidiaries resulting in the ratio of (x) the
pro forma Consolidated Debt of the Corporation (including such proposed Debt on
a pro forma basis) to (y) the Consolidated Operating Cash Flow of the
Corporation for the four (4) most recent consecutive full fiscal quarters of the
Corporation immediately preceding the date such Debt is assumed, incurred or
created, being in excess of (1) 7.0 to 1.0 during the fiscal year of the
Corporation ending December 31, 1997 and (2) 5.0 to 1.0 during any fiscal year
of the Corporation thereafter; provided, that at any time on or prior to
December 31, 1999, Consolidated Operating Cash Flow of the Corporation shall be
calculated by multiplying the Consolidated Operating Cash Flow for the two (2)
most recent consecutive full fiscal quarters of the Corporation by two (2); or
(v) failure of the Corporation to comply in all material respects
with any of the terms or covenants contained in the Purchase Agreement or
failure of any representation or warranty contained in the Purchase Agreement to
be true in all material respects when made or deemed made and in either case,
such failure continues uncured for a period of sixty (60) days from the earlier
to occur of (x) written notice from a holder of the Series B Preferred Stock
specifying such failure and requesting that it be cured or (y) an executive
officer of the Corporation becoming aware of such failure.
(b) Immediately upon the occurrence of a Series B Elective Redemption
Event, written notice of occurrence of such Series B Elective Redemption Event
(an "Elective Redemption Notice") shall be delivered by the Corporation in
person, mailed by certified or registered mail, return receipt requested, mailed
by overnight mail or sent by telecopier to the holders of record of the Series B
Preferred Stock, such notice to be addressed to each such holder at its address
as shown by the records of the Corporation. The Corporation may also give such
Elective Redemption Notice in the same manner prior to the occurrence of the
Series B Elective Redemption Event, which notice shall specify the Series B
Elective Redemption Event and the date it is expected to occur. Each holder of
Series B Preferred Stock that wishes to exercise such holder's right to Series B
Elective Redemption shall do so by delivering written notice thereof to the
Corporation, accompanied by the certificates for the shares to be redeemed and
tendered for such purpose (or if any such certificate is claimed to have been
lost, stolen or destroyed, an affidavit of the holder to such effect), at any
time after the earlier of the occurrence of such Series B Elective Redemption
Event or the date of such holder's receipt of the Elective Redemption Notice,
and not later than ten (10) Business Days after the later of the occurrence of
such Series B Elective Redemption Event or receipt by such holder of such
Elective Redemption Notice. The redemption date for the Series B Elective
Redemption of the Series B Preferred Stock of any holder ("Elective Redemption
Date") shall be (i) the fifth (5th) Business Day after such holder so exercises
such holder's right to Series B Elective Redemption or (ii) such other date as
such holder and the Corporation may otherwise agree in writing. On the
applicable Elective Redemption Date, against surrender of the certificates for
the shares to be so redeemed (or such affidavits, indemnity and
<PAGE> 6
undertakings as would be necessary to replace any such certificate claimed to
have been lost, stolen or destroyed), the Corporation shall pay the aggregate
Series B Elective Redemption Price to each holder of Series B Preferred Stock
exercising the Series B Elective Redemption pursuant to Section 5(b). Unless the
Corporation defaults in payment of the Series B Elective Redemption Price for
the shares of Series B Preferred Stock tendered pursuant to this Section 6(b),
(x) such shares of Series B Preferred Stock tendered shall no longer be deemed
outstanding, (y) the rights to receive dividends thereon shall cease to accrue
and (z) all rights of the holders of such shares of Series B Preferred Stock
shall cease (other than the right to receive payment in full of the Series B
Elective Redemption Price), in each case from and after the Elective Redemption
Date.
(c) If the Corporation shall default in the payment of any portion of
the Series B Elective Redemption Price, then, in addition to any other rights
and remedies of the holders of shares of Series B Preferred Stock which may be
available herein or at law or in equity, the shares of Series B Preferred Stock
that were to be redeemed by such portion shall be deemed to have continued to be
outstanding, dividends shall have continued to accrue thereon, and the holders
thereof shall have all of the rights of a holder of Series B Preferred Stock,
until such time as such default shall no longer be continuing.
Section 7. Voting Rights; Election of Director; Certain Restrictions.
(a) Except as otherwise required under Delaware law or as set forth in
this Section 7, the holders of Series B Preferred Stock shall not be entitled to
vote on any matter required or permitted to be voted upon by the stockholders of
the Corporation. In any case in which the holders of Series B Preferred Stock
shall be entitled to vote pursuant to Delaware law or this Section 7, each
holder of Series B Preferred Stock shall be entitled to one vote for each share
of Series B Preferred Stock.
(b) So long as any shares of Series B Preferred Stock are outstanding,
the holders of the Series B Preferred Stock, voting as a separate series, shall
be entitled to elect one member of the Board of Directors (the "Series B
Preferred Stock Director"). The holders of at least ten percent (10%) of the
shares of Series B Preferred Stock shall be entitled to call a meeting for the
election or the removal of the Series B Preferred Stock Director. At any meeting
(or in a written consent in lieu thereof) held for the purpose of electing or
removing the Series B Preferred Stock Director, (i) the presence in person or by
proxy (or the written consent) of the holders of a majority of the shares of
Series B Preferred Stock then outstanding shall constitute a quorum of the
Series B Preferred Stock and (ii) the affirmative vote of such majority of the
shares of Series B Preferred Stock present in person or represented by proxy or,
in the event of a written consent, a majority of the shares of Series B
Preferred Stock then outstanding shall be required to elect or remove such
Series B Preferred Stock Director. The Series B Preferred Stock Director shall
hold office until the next annual meeting of stockholders and his successor is
duly elected and qualified or until his earlier resignation or removal. The
Series B Preferred Stock Director may be removed, with or without cause, by, and
shall not be removed otherwise than by, the vote or written consent of the
holders of a majority of the outstanding shares of Series B Preferred Stock who
are entitled to vote in the election of the Series B Preferred Stock Director,
voting as a separate series. Any vacancy in the office of the Series B Preferred
Stock Director shall be filled only by vote or written consent of the holders of
a majority of the outstanding shares of the Series B Preferred Stock who are
entitled to vote in the election of such Series B Preferred Stock Director. So
long as the holders of Series B Preferred Stock are entitled to elect the Series
B Preferred Stock Director as provided herein, the number of Directors shall not
be increased to more than ten (10) Directors except (x) by the vote or written
consent of the holders of a majority of the outstanding shares of Series B
Preferred Stock who are entitled to vote in the election of such Series B
Preferred Stock Director or (y) as otherwise provided in Article IV, Section
2(C)(3)(c)(ii) of the Certificate of Incorporation. The issuance of any Series B
Preferred Stock by the Corporation shall be deemed to increase the number of
Directors of the Corporation by one (1) and the vacancy shall be filled by the
holders of Series B Preferred Stock in the manner prescribed herein.
<PAGE> 7
(c) So long as any shares of Series B Preferred Stock are outstanding,
the Corporation shall not take any of the following actions without the
affirmative vote or written consent of the holders of at least a majority of the
then outstanding shares of Series B Preferred Stock, voting or consenting, as
the case may be, as a separate series, in person or by proxy, by resolution or
in writing, as the case may be:
(i) create, authorize or issue any class or series of Capital
Stock of the Corporation hereafter which ranks pari passu with or senior to the
Series B Preferred Stock with respect to the payment of dividends, redemption
rights, or distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation;
(ii) amend or alter the specified rights, preferences,
privileges, powers or other rights of the holders of Series B Preferred Stock
(including by any amendment to the Certificate of Incorporation of the
Corporation) in any manner adverse thereto;
(iii) redeem or purchase any shares of Junior Securities or any
other shares of a class or series of Capital Stock of the Corporation which
ranks pari passu with the Series B Preferred Stock; provided, that the
Corporation may redeem or purchase shares of Common Stock from stockholders for
an aggregate amount not to exceed $1,000,000 in any fiscal year of the
Corporation; or
(iv) declare, pay or set apart for payment any dividend on any
shares of Junior Securities or any other shares of a class or series of Capital
Stock of the Corporation which ranks pari passu with the Series B Preferred
Stock.
Section 8. Contractual Rights Not Limited. Nothing in this resolution or
in the powers, preferences and rights of the Series B Preferred Stock set forth
herein shall limit or abrogate any powers, preferences and rights granted to the
holders of the Series B Preferred Stock pursuant to any contract of such holders
with the Corporation, or with any other stockholders of the Corporation,
including without limitation the Purchase Agreement.
Section 9. Insufficient Funds. If the funds of the Corporation legally
available for purchase or redemption of the Series B Preferred Stock on any date
are insufficient under applicable law to purchase or redeem the number of shares
of Series B Preferred Stock to be so purchased or redeemed on such date, the
holders of Series B Preferred Stock to be so purchased or redeemed on such date
shall share ratably in any funds available for purchase or redemption of such
shares according to the respective amounts that would be payable with respect to
the number of shares owned by them if the shares to be so purchased or redeemed
on such date were purchased or redeemed in full. The shares of Series B
Preferred Stock not purchased or redeemed shall remain outstanding and continue
to be entitled to all of the rights and preferences provided herein. At any time
thereafter when additional funds of the Corporation are sufficient under
applicable law for the purchase or redemption of shares of Series B Preferred
Stock, such funds will be used, as soon as practicable and in any event by the
end of the next succeeding fiscal quarter, to purchase or redeem the balance of
such shares of Series B Preferred Stock or such portion thereof for which funds
are available, on the basis set forth above.
Section 10. Certain Remedies. Any registered holder of Series B
Preferred Stock shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Certificate and to enforce specifically the
terms and provisions of this Certificate in any court of the United States or
any state thereof having jurisdiction, this being in addition to any other
remedy to which such holder may be entitled at law or in equity.
<PAGE> 8
Section 11. Reissuance of Series B Preferred Stock. Shares of Series B
Preferred Stock that have been issued and reacquired by the Corporation in any
manner, including shares redeemed or purchased, shall not be reissued as Series
B Preferred Stock but (upon compliance with any applicable provisions of the
laws of Delaware) shall have the status of authorized and unissued shares of
undesignated Preferred Stock and may be redesignated and reissued as part of any
series of Preferred Stock (other than Series B Preferred Stock) in accordance
with the Certificate of Incorporation.
Section 12. Business Day. If any payment shall be required by the terms
hereof to be made on a day that is not a Business Day, such payment may instead
be made on the immediately succeeding Business Day, but if such payment includes
the amount of any accrued dividends, such dividends shall continue to accrue to
the actual date of payment.
Section 13. Definitions.
As used in this Certificate the following terms shall have the following
meanings (with terms defined in the singular having comparable meanings when
used in the plural and vice versa, unless the context otherwise requires):
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means any day except a Saturday, a Sunday, or other day
on which commercial banks in the State of Oregon or the State of North Carolina
are authorized or required by law or executive order to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting or non-voting) of, such Person's capital stock and any and
all rights, warrants or options exchangeable for or convertible into such
capital stock.
"Certificate" means this Certificate of Designation.
"Change in Control" means any event or circumstance upon which any
Person or group (as such term is used for purposes of Section 13 of the
Securities Exchange Act of 1934, as amended) of Persons, directly or indirectly
and in one transaction or a series of transactions (whether pursuant to share
acquisition or exchange, merger, reorganization, recapitalization, or similar
transaction), acquires (i) more than fifty percent (50%) of the voting
securities of the Corporation determined on a fully diluted basis or (ii)
securities or other rights (except for a revocable proxy for a specific meeting)
sufficient to permit such Person or group to elect a majority of the members of
the Board of Directors.
"Consolidated" means, when used with reference to financial statements
or financial statement items of the Corporation and its Subsidiaries, such
statements or items on a consolidated basis in accordance with applicable
principles of consolidation under GAAP.
"Debt" means, with respect to the Corporation and its Subsidiaries at
any date and without duplication, the sum of the following calculated in
accordance with GAAP: (i) all liabilities, obligations and indebtedness for
borrowed money including but not limited to obligations evidenced by bonds,
debentures, notes or other similar instruments of any such Person, (ii) all
obligations to pay the deferred purchase price of property or services of any
such Person, except trade payables arising in the ordinary course of business
not more than ninety (90) days past due, (iii) all obligations of any such
Person as lessee under capital leases, (iv) all Debt of any other Person secured
by a lien on any asset of any such Person, (v) all obligations, contingent or
otherwise, of any such Person relative to the face amount of letters of credit,
<PAGE> 9
whether or not drawn, and banker's acceptances issued for the account of any
such Person, (vi) all obligations to redeem, repurchase, exchange, defease or
otherwise make payments in respect of Capital Stock or other securities of such
Person, (vii) all termination payments which would be due and payable by any
such Person pursuant to any hedging agreement, and (viii) all guaranties by any
such Person of obligations of any other Person of the type described in clauses
(i) through (viii) of this definition.
"GAAP" means generally accepted accounting principles, as recognized by
the American Institute of Certified Public Accountants and the Financial
Accounting Standards Board, maintained on a consistent basis for the Corporation
and its Subsidiaries throughout the period indicated and consistent with the
prior financial practice of the Corporation and its Subsidiaries.
"Interest Expense" means, for any period, the aggregate amount of
interest paid or payable by the Corporation for such period in respect of Debt
outstanding during such period (including, with respect to payments of capital
lease obligations, the portion thereof comparable to interest payments).
"Net Income" means, with respect to the Corporation and its Subsidiaries
for any period, the Consolidated net income (or loss) of the Corporation and its
Subsidiaries for such period determined in accordance with GAAP.
"Operating Cash Flow" means for any period, Consolidated Net Income for
such period plus (i) to the extent deducted in determining the amount thereof,
(w) income taxes, (x) Interest Expense, (y) depreciation and amortization and
(z) extraordinary losses, minus (ii) to the extent included in determining the
amount thereof, extraordinary gains.
"Person" means any individual, firm, corporation, partnership, limited
liability company, trust, incorporated or unincorporated association, joint
venture, joint stock company, governmental body or other entity of any kind.
"Public Offering" means the offering and sale of Capital Stock of the
Corporation pursuant to an effective registration statement under the Securities
Act of 1933, as amended.
"Purchase Agreement" means the Preferred Stock and Warrant Purchase
Agreement dated July ___, 1997 between the Corporation and First Union Capital
Partners, Inc., as amended or supplemented from time to time.
"Subsidiary" means as to any Person, any corporation, partnership or
other entity of which more than fifty percent (50%) of the outstanding Capital
Stock or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other managers of such corporation,
partnership or other entity is at the time, directly or indirectly, owned by, or
the management is otherwise controlled by, such Person (irrespective of whether,
at the time, capital stock of any other class or classes of such corporation
shall have or might have voting power by reason of the happening of any
contingency); provided, that in no event shall any Person be deemed a Subsidiary
of the Corporation solely by reason of the terms of any Management Services
Agreement (as defined in the Purchase Agreement). Unless otherwise qualified,
references to "Subsidiary" or "Subsidiaries" herein shall refer to those of the
Corporation.
This Certificate set forth above has been duly adopted in accordance
with the provisions of Section 151 of the Delaware Code, the Board of Directors
of the Corporation having adopted resolutions setting forth and declaring the
advisability thereof.
<PAGE> 10
IN WITNESS WHEREOF, the Corporation has made this Certificate to be duly
executed in its corporate name on this 7th day of July, 1997.
PHYSICIAN PARTNERS, INC.
President
ATTEST:
By:__________________________________
Tim E. Dupell
Secretary
<PAGE> 1
Exhibit 4.1
CREDIT AGREEMENT
DATED AS OF: February 1, 1997
BETWEEN: PHYSICIAN PARTNERS, INC., a Delaware corporation ("Company"),
whose address is 111 S.W. Columbia Street, Suite 725, Portland,
Oregon 97201, Attention, Mr. David M. Goldberg for mail and
street delivery; and 503-224-4713, Attention: Mr. David M.
Goldberg, by telecopy
AND: UNITED STATES NATIONAL BANK OF OREGON, a national banking
association ("Bank"), whose address is Corporate Banking, 111
S.W. Fifth Avenue (T-4), Portland, Oregon 97204, Attention: Mr.
Al Munson, for street delivery; Corporate Banking Division, Post
Office Box 4412, Portland, Oregon 97208, Attention: Mr. Al
Munson, for mail; and 503-275-5795, Attention: Mr. Al Munson,
for telecopy
R E C I T A L S
A. Company is the surviving entity from a merger of The Corvallis
Clinic, Inc. (formerly known as The Corvallis Clinic, P.C.), HealthFirst
Medical Group, Inc. (formerly known as HealthFirst Medical Group, P.C., and
Metropolitan Clinic, P.C.), and Medford Clinic, Inc. (formerly known as Medford
Clinic, P.C.), into Company (the "Merger").
B. Bank and Company desire to consolidate, amend, and restate
certain revolving loan facilities aggregating $5,500,000, to which Bank and
each of the merged entities were parties, copies of which are attached hereto
as Exhibit A.
C. Bank has agreed to extend credit to Company in the amount of
$5,500,000, subject to the terms and conditions of this Agreement.
D. Company desires to assume certain other loan facilities and
related obligations to which various of the merged parties and U.S. Bank were
party.
Therefore the parties agree as follows:
-1-
<PAGE> 2
SECTION 1
DEFINITIONS
1.1 Certain Defined Terms. As used in this Agreement, the following
terms have the following meanings, which apply to both the singular and plural
forms of the terms defined:
"ADA" means the Americans with Disabilities Act of 1990.
"Advance" has the meaning given in Section 2.1.
"Affiliate" means any Person (1) that directly or indirectly controls,
or is controlled by, or is under common control with Company; or (2) that
directly or indirectly beneficially owns or holds 5 percent or more of any
class of voting stock of Company. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
"Agreement" means this Credit Agreement, as amended, supplemented, or
modified from time to time.
"Bank Account" means Company's deposit account No. 240-0001-455 at the
Portland Main branch of Bank.
"Banking Day" means a day in which dealings in United States dollars
are carried out on the interbank market.
"Basis Point" means the interest rate of one one-hundredth percent
(0.01%) per annum.
"Business Day" means a day on which Bank's Oregon corporate Banking
department at 111 SW Fifth Avenue, Portland, Oregon, or such other address at
which it may become located, is open for business.
"Commitment Period: has the meaning given in Section 2.1.
"Environmental Laws" means all federal, state, and local laws,
regulations, and orders relating to the storage, transportation, release,
remediation, or removal of hazardous or toxic substances, pollutants, or
contaminants.
"Event of Default" has the meaning given in Section 7.1.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations and published interpretations
thereof.
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"Financial Statements" means the balance sheets, statements of
income and retained earnings, and other reports required under Section 5.6.
"GAAP" means generally accepted accounting principles and practices
in the United States.
"IBOR Rate" means a rate of interest determined by Bank equal to
the rates (rounded up to the nearest 1/16th of 1 percent) at which recognized
dealers on the interbank market in London or New York would offer to place a
U.S. dollar-denominated deposit in a foreign branch or office of Bank in an
amount equal to the amount of the Advance requested by Company and for a period
equal to the Interest period selected by Company for the Advance. The IBOR Rate
shall be increased to take into account (a) the cost to Bank to maintain any
reserves for a eurodollar deposit made during an Interest Period to a IBOR Loan
and (b) any required statutory and regulatory reserves for foreign loans to
United States residents.
"IBOR Rate Loan" means an Advance for which Company has selected a
IBOR Rate.
"Interest Period" has the meaning given in Section 2.1(e).
"Interest Rate" means the rate of interest on the Line of Credit, as
determined pursuant to Section 2.1(d).
"line of Credit" means the credit facility described in Section 2.1.
"Loan" means the Line of Credit and any Advance.
"Loan Documents" means this Agreement, the Note, and all other
documents executed by Company and required to be delivered to Bank in
connection with the Loan.
"Merger" means the merger and reorganization described in the
Recitals.
"Note" means the promissory note in the form of Exhibit B hereto.
"PC Affiliates" means Physician Partners Corvallis, P.C., Physician
Partners HealthFirst, P.C., and Physician Partners Medford, P.C., each an
Oregon professional corporation.
"Person" means an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture,
governmental authority, or other entity of whatever nature.
"Prime Rate" means on any day the rate per annum publicly announced
by Bank on that day at its principal office as its "prime rate of interest,"
and is not, for
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example, the lowest rate of interest that Bank collects from any borrower or a
class of borrowers.
"Prime Rate Loans" means an Advance for which Company has selected
the Prime Rate.
"Security Agreement" means the security agreement in the form of
Exhibit C hereto.
1.2 Accounting Terms. Except as otherwise provided herein, accounting
terms not specifically defined shall be construed, and all accounting
procedures shall be performed, in accordance with GAAP.
SECTION 2
DESCRIPTION OF LINE OF CREDIT
2.1 Line of Credit. Bank agrees, on the terms and conditions of this
Agreement and the Note, at the sole discretion of Bank, to make loans and
advances of credit ("Advances") to company from time to time on Business Days
during the period commencing on the date of this Agreement and ending on June
30, 1997 (the "Commitment Period"), in an aggregate amount not exceeding at any
one time $5,500,000. The agreement in this Section 2.1 is for a revolving
credit and within the amount and time specified, Company may borrow, prepay,
and reborrow.
(a) Manner of Borrowing. Company may request an Advance on any
Business Day by providing Bank with notice of the requested Advance as provided
herein by 11:00 a.m., Portland, Oregon, time (i) on the same Business Day as
the day of the Advance in the case of Prime Rate Loans and (ii) three Business
Days prior to the day of the Advance in the case of IBOR Rate Loans. The request
for an Advance may be oral or written and must be made by a duly authorized
officer or employee and must state the date and the amount of the requested
Advance. Any such request shall be irrevocable and shall constitute a
representation and warranty that as of the date of the request (i) no Event of
Default, or no event which, with notice or lapse of time or both, would
constitute an Event of Default, has occurred and is continuing, and (ii) the
representations and warranties of Company contained in this Agreement are true
and correct as of the date of the Advance. Amounts advanced pursuant to this
Agreement shall be made available to Company by deposit to the Bank Account.
IBOR Rate Advances shall be in the amount of $500,000, plus additional
increments of $100,000. The list of officers and employees initially authorized
to request Advances and specimens of their signatures is attached hereto as
Schedule 2.1 a. Company may amend this list from time to time by supplements
executed by the president and chief financial officer and by the officer or
employee who is being added to the list. Bank may act in reliance upon any oral
or written request believed in good faith to have been authorized by any of the
Persons identified in Schedule 2.1 a, as amended from time to time.
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<PAGE> 5
(b) Note. Bank's aggregate Commitment shall be evidenced by an
Optional Advance Revolving Line of Credit Note, maturing on the last day of the
Commitment Period, in the form of the attached Exhibit B.
(c) Repayment of Principal. Company promises to repay to Bank or
its order (i) the principal amount of all IBOR Rate Loans on the last day of
the applicable Interest Periods and (ii) the principal amount of all Prime Rate
Loans on the last day of the Commitment Period.
(d) Interest Rate. Company promises to pay interest on the
unpaid principal amount from the date of each Advance until such Advance shall
be due and payable in accordance with the rate option or options chosen by
Company, at the annual rate applicable on the date of the Advance equal to (i)
the Prime Rate with respect to Prime Rate Loans or (ii) the IBOR Rate plus 200
Basis Points (2%) with respect to IBOR Rate Loans. If Company fails to state
its preference among the two interest rate options, the Prime Rate shall apply.
(e) Interest Period. When selecting an IBOR Rate Loan, Company
shall also select the applicable interest period for the Advance (the "interest
period"). The Interest Period shall be for one, two, three, or six months,
beginning on the date of the IBOR Rate Loan and ending on and including the day
preceding the same day (or if there is no such same day, the day preceding the
last day) in the first, second, third, or sixth calendar month thereafter,
provided that Company shall not select an Interest Period that extends beyond
the Commitment Period
(f) Interest Payments. Subject to Section 2.2(d), accrued
interest on the Advances shall be payable in arrears as follows: (i) for IBOR
Rate Loans, on the last day of each month and on the last day of the Interest
Period and (ii) for Prime Rate Loans, on the last day of each month.
(g) Late Charge. If any payment is 19 days or more past due,
Company will pay a late charge of 5 percent of the delinquent payment.
(h) Prior Facilities. Upon satisfaction of the conditions set
forth in Section 3, the notes in the form attached as Exhibit A shall be
superseded, restated, and amended by the Note.
2.2 Manner of Payments.
(a) Place of Payment. All payments and prepayments of principal
and interest on the Line of Credit and all other amounts payable hereunder by
Company to Bank shall be made in United States dollars and in immediately
available funds to Bank at the corporate banking note department of its head
office branch at 111 S.W. Fifth Avenue, Portland, Oregon, by 1 p.m. Portland,
Oregon, time on the date due and may be withdrawn when due
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<PAGE> 6
by Bank debiting the Bank Account. Company shall provide Bank with notice of any
payment or prepayment prior to 11:30 a.m. on the day of such payment.
(b) Setoff. Company hereby authorizes Bank, if and to the extent any
payment to be made by Company under the Loan Documents is not promptly made when
due, to set off any such payment from time to time against any of or all the
accounts of Company with Bank or any Affiliate of Bank.
(c) Interest Computation. All computations of interest and fees shall be
made on the basis of a year of 360 days for the actual number of days (including
the first day but excluding the last day) occurring in the period for which such
interest or fees are payable. Upon any change in the Prime Rate, the applicable
Interest Rate on all Prime Rate Loans shall simultaneously change whether or not
Company has received notice of such change.
(d) Payment Date. Whenever any payment hereunder or under the Note is due
on a day other than a Business Day, the payment shall be made on the next
succeeding Business Day and such extension of time shall in such case be
included in the computation of interest; provided that if the last day of an
Interest Period falls on a day other than a Business Day, payment of the IBOR
Rate Loan shall be made on the first Business Day preceding the last day of the
Interest Period.
(e) Application of Payments. Any payment made by Company hereunder shall
be applied first against fees, expenses, and indemnities due hereunder, if any;
second against interest due on amounts in default, if any; third, against
interest due on the Loan; and thereafter against Loan principal.
2.3 IBOR Rate Loans.
(a) Renewal. Company may, subject to the terms of this Agreement, renew an
IBOR Rate Loan upon the expiration of an Interest Period, upon three Business
Days' prior notice to Bank. If Company fails to give notice of renewal, Company
shall be deemed to have selected a Prime Rate Loan to the extent of any maturing
IBOR Rate Loan.
(b) Prepayment. During any Interest Period, Company may not prepay the
principal amount of any IBOR Rate Loan, unless Company pays Bank at all costs,
losses, fees, and expenses incurred by Bank in connection with such repayment,
as reasonably determined by Bank.
(c) Basis for Determining Interest Rate Inadequate or Unfair. If with
respect to any Interest Period: (i) by reason of circumstances affecting the
IBOR market generally, deposits in dollars in the applicable amounts are not
being offered to bank in the interbank markets for such Interest Period, or (ii)
the IBOR Rate will not adequately and fairly reflect the cost to Bank of
maintaining or funding its IBOR Rate Loans for such Interest Period, Bank shall
notify Company. Thereafter, until Bank notifies Company that the circumstances
giving rise to such suspension no longer exist (a) the obligations of Bank to
make IBOR Rate
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<PAGE> 7
Loans shall be suspended and (b) Company shall repay in full the then
outstanding principal amount of each IBOR Rate Loan, together with accrued
interest thereon, on the last day of the then current Interest Period applicable
to such Loan. If not then in default, Company may repay the affected IBOR Rate
Loan by requesting a Prime Rate Loan in an equal principal amount.
(d) Illegality. If, after the date of this Agreement, the adoption of any
applicable law, rule, or regulation, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central
bank, or comparable agency charged with the interpretation or administration
thereof, or compliance by Bank with any request or directive (whether or not
having the force of law) of any such authority, central bank, or comparable
agency shall make it unlawful or impossible for Bank to make, maintain, or fund
its IBOR Rate Loans, Bank shall forthwith give notice thereof to Company. Upon
receipt of such notice, Company shall repay in full the then outstanding
principal amount of each IBOR Rate Loan of Bank, together with accrued interest
thereon, on either (a) the last day of the then current Interest Period
applicable to such IBOR Rate Loan if Bank may lawfully continue to maintain and
fund such IBOR Rate Loans to such day or (b) immediately if Bank may not
lawfully continue to fund and maintain such IBOR Rate Loan to such day. If not
then in default, Company may repay the affected IBOR Rate Loan by requesting a
Prime Rate Loan in an equal principal amount from the Bank. Upon any such
repayment, Company also shall pay all accrued interest to the date of the
repayment, plus such additional amounts as may be necessary to compensate Bank
for any loss and any direct or indirect costs, including the cost of
re-employment of the repaid funds at lower Interest Rates.
(e) Increased Cost. If the adoption of any applicable law, rule, or
regulation, or any change therein, or any change in the interpretation of
administration thereof by any governmental authority, central bank, or
comparable agency charged with the interpretation or administration thereof, or
compliance by Bank with any request or directive (whether or not having the
force of law) of any such authority, central bank, or comparable agency:
(i) shall subject Bank to any tax, duty, or other charge with respect to
its IBOR Rate Loans or its obligation to make IBOR Rate Loans, or shall change
the basis of taxation of payments to Bank of the principal of or interest on
its IBOR Rate Loans or any other amounts due under this Agreement in respect
to its IBOR Rate Loans, or its obligation to make IBOR Rate Loans (except for
changes in the rate of tax on the overall net income of Bank imposed by the
jurisdiction in which Bank's principal executive office is located); or
(ii) shall impose or modify any reserve (including, without limitation, any
imposed by the Board of Governors of the Federal Reserve System), special
deposit, or similar requirement against assets of, deposits with or for the
account of, or credit extended by Bank or
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<PAGE> 8
shall impose on Bank any other condition affecting its IBOR Rate Loans, the
Note, or its obligation to make IBOR Rate Loans;
and the result of any of the foregoing is to increase the cost to Bank of
making or maintaining its IBOR Rate Loans, or to reduce the amount of any sum
received or receivable by Bank under this Agreement by an amount deemed by Bank
to be material, then, within 15 days after demand by Bank, Company shall pay to
Bank such additional amount as will compensate Bank for such increased cost or
reduction. Bank will promptly notify Company of any event of which it has
knowledge, occurring after the date hereof, which will entitle Bank to
compensation pursuant to this section. A certificate of Bank claiming
compensation under this section defining such reason for said compensation and
setting forth the additional amounts to be paid to it hereunder shall be
conclusive in the absence of manifest error. If Bank demands compensation under
this section, Company may at any time, upon at least five Banking Days' prior
notice to Bank, repay in full the then outstanding IBOR Rate Loans of Bank,
together with accrued interest thereon to the date of prepayment. If not then
in default, Company may repay the affected IBOR Rate Loan by requesting a Prime
Rate Loan in an equal principal amount. Upon any such repayment, Company also
shall pay all accrued interest to the date of the repayment, plus such
additional amounts as may be necessary to compensate Bank for any loss and any
direct or indirect costs, including the cost of re-employment of the repaid
funds at lower Interest Rates.
(f) Effect on Prime Rate Loans. If notice has been given pursuant to
Section 2.3(c) or (d) requiring the IBOR Rate Loans to be repaid, then, unless
and until Bank notifies Company that the circumstances giving rise to such
repayment no longer apply, all Loans which would otherwise be made by Bank as
IBOR Rate Loans shall be made instead as Prime Rate Loans. If Bank notifies
Company that the circumstances giving rise to such repayment no longer apply,
Company may obtain a IBOR Rate Loan from Bank on the first day of the next
succeeding Interest Period applicable to each outstanding IBOR borrowing in the
amount of the IBOR Rate Loan which would have been outstanding from Bank as
part of such IBOR borrowing as if the provisions of Section 2.3(c) or (d) had
never applied.
SECTION 3
CONDITIONS OF LENDING
3.1 Conditions to Loan. The obligation of Bank to make any advance
under the Loan is subject to fulfillment of the following conditions:
(a) Notice of Borrowing. Bank shall have received due notice of the
borrowing pursuant to Section 2.1(a).
(b) Loan Documents. The following shall have been delivered to Bank
in form and substance reasonably satisfactory to Bank:
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<PAGE> 9
(i) The duly executed Note, Security Agreement, and associated
financing statements.
(ii) Copies of Company's certificate of incorporation and bylaws,
certified by the Secretary of Company as true and correct, a copy of the
resolutions of the board of directors of Company, authorizing the
execution and performance of the Loan Documents, certified by the Secretary
of Company as true and correct and in full force and effect, and an
incumbency certificate executed by the Secretary of Company specifying the
officers authorized to execute the Loan Documents and the officers and
employees initially authorized to request Advances.
(iii) A certificate or certificates of the Secretary of State of the
state of Delaware certifying the due incorporation and continued existence
of Company under the laws of the state of Delaware, and due consummation
of the Merger.
(iv) Copies of the articles of incorporation and bylaws of each of
the PC Affiliates, certified by the secretary of each as true and correct,
a copy of the resolutions of the board of directors of each of the PC
Affiliates, authorizing the execution and performance of the Loan Document
to which each is a party, certified by the secretary as true and correct
and in full force and effect, and an incumbency certificate executed by
the secretary of each of the PC Affiliates specifying the officers
authorized to execute Loan Documents to which each PC Affiliate is a party.
(v) Assumption Agreement between Bank and Company relating to
facilities described in recital D, in the form of Exhibits D through N
hereto.
(c) Loan Assumption Fee. Bank shall have received payment of a loan
assumption fee of $75,000 for this facility.
(d) Absence of Default. At the date of the Note and each Advance, no
Event of Default and no event which, with notice or lapse of time or both,
would constitute an Event of Default, shall have occurred and be continuing or
will have occurred as a result of the making of the Loan.
(e) Representations and Warranties. The representations and
warranties in Section 4 hereof shall be true and correct as of the date of the
Note and as of the date of each Advance.
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<PAGE> 10
(f) Other Information. Bank shall have received such other statements,
opinions, certificates, documents, and information with respect to the matters
contemplated by this Agreement as it may reasonably request.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF COMPANY
To induce Bank to make each and every Advance, Company represents and
warrants to Bank that:
4.1 Use of Advances. All Advances will be used by Company only for
working capital and general corporate purposes and not to acquire any "margin
stock" as that term is used in Regulation U of the Federal Reserve Board or for
any illegal purpose.
4.2 Corporate Existence. Company is a duly formed and organized and
validly existing Delaware corporation and is duly qualified to transact
business in all other states where such qualification is necessary for the
proper conduct of its business or the ownership of its property. Company has
provided to Bank true and correct copies of its Certificate of Incorporation,
Bylaws, and the Certificate of Merger of the Merger.
4.3 Authorization. The execution, delivery, and performance of the Loan
Documents by Company has been duly authorized by Company's board of directors
and any shareholder authorization required by the Company or other Persons has
been duly obtained. The resolutions of its board of directors furnished to Bank
pursuant to Section 3.1 are in full force and effect without alteration. The
Loan Documents have been executed and delivered to Bank by an officer of
Company who has been duly authorized to perform such acts.
4.4 Enforceability. The Loan Documents are the legally valid and
binding obligations of Company, each enforceable against Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, moratorium, reorganization, or similar laws affecting
the rights of creditors generally.
4.5 Financial Information. The financial information provided by
Company to Bank is true, correct, and complete in all material respects as of
the date of such information, and no material adverse change in the business
affairs, financial condition, prospects, or property of Company has occurred
since the delivery of such financial information to Bank.
4.6 Compliance with Laws. Company is in material compliance with all
federal, state, and local laws, regulations, and orders affecting its business
affairs and property, including Environmental Laws, the Fair Labor Standards
Act, ERISA, ADA, and the Internal Revenue Code.
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<PAGE> 11
4.7 No Default. Company is not in breach of or in default under (nor
does there exist conditions which, with notice or lapse of time or both, would
constitute a breach of or a default under) the Loan Documents or any other
material contract to which it is a party or that affects or binds its property.
4.8 Litigation. There is no litigation, investigation, or proceeding of
any nature whatsoever pending or, to Company's knowledge, threatened or
impending involving Company or its business or property that could reasonably
be anticipated to materially and adversely affect the ability of Company to
perform its obligations to Bank under the Loan Documents.
SECTION 5
AFFIRMATIVE COVENANTS OF COMPANY
At all times during the term of this Agreement and until payment in
full of the Note and performance of all obligations of Company under the Note
and this Agreement, Company will comply with the following affirmative
covenants:
5.1 Corporate Status. Company will preserve its legal status and
franchises and pay all taxes and annual fees in connection therewith.
5.2 Compliance with Law. Company will comply with all federal, state,
and local laws, regulations, and orders applicable to its business or property,
including without limitation, Environmental Laws, the Fair Labor Standards Act,
ERISA, ADA, and the Internal Revenue Code.
5.3 Insurance. Company will obtain and maintain with responsible
carriers such worker's compensation, fire with extended coverage endorsement,
public liability, property damage, and other insurance in coverage amounts,
deductibles, and terms as may be consistent with industry practices and as may
be reasonably acceptable to Bank and will provide evidence of such insurance to
Bank as and when required by Bank. Alternatively, Company may self insure, so
long as such self insurance is on terms consistent with industry practices and
reasonably acceptable to Bank.
5.4 Payment of Obligations. Company will pay and perform when due all
material obligations to all third Persons except for those obligations being
contested by Company in good faith, by appropriate means and with an adequate
reserve being maintained for payment in the event of an adverse outcome.
5.5 Taxes. Company will file all tax returns required by law to be
filed and will pay all taxes and similar government impositions when due except
for those taxes and impositions being contested by Company in good faith, by
appropriate means and with an adequate reserve being maintained for payment in
the event of an adverse outcome.
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<PAGE> 12
5.6 Financial Information. Company shall provide periodic
financial statements, information, and reports as reasonably requested by Bank.
All such statements, information, and reports shall be complete and accurate in
all material respects. At a minimum, Company will provide Bank:
(a) Year-end Audited Report. As soon as available and not
later than 120 days after the close of each fiscal year, a true copy of
Company's Financial Statements for such year audited by a recognized firm of
independent certified public accountants and in a form and level of detail
acceptable to Bank, together with an unqualified opinion of such accountants
that such Financial Statements have been prepared in accordance with GAAP and
present fairly Company's financial position and the results of its operations
and cash flows for the period covered thereby.
(b) Interim Financial Statements. As soon as available, and
in any event within 20 days after the end of each calendar month, the unaudited
balance sheet and statements of income, cash flows, and retained earnings of
Company as of the end of such month, accompanied at the end of each calendar
quarter by a certificate of the chief financial officer of Company stating
that: (i) such unaudited balance sheet and statements of income, cash flows,
and retained earnings have been prepared in accordance with GAAP and present
fairly the financial position and the results of operations of Company as of
the end of and for such quarter subject to normal year-end adjustments, (ii) as
of the date of such certificate, no Event of Default and no event which, with
notice or lapse of time or both, would constitute an Event of Default, has
occurred and is continuing, and (iii) the representations and warranties in
Section 4 are true and correct as though made as of the date of such
certificate.
(c) SEC Filings. Copies of any documents or reports Company
files with the Securities and Exchange Commission.
(d) Other Information. All other statements, reports, and
other information as Bank may reasonably request concerning the financial
condition and business affairs of Company.
(e) GAAP. The Financial Statements and all financial books
and records of Company shall be maintained or prepared by the application of
GAAP, with such changes in GAAP as are approved by its independent public
accountants. The Financial Statements shall present fairly the financial
position of Company at their respective dates and the results of its operations
and cash flows for the periods covered thereby, subject, with respect to
interim financial statements, to year-end audit adjustments, consisting of only
normal recurring accruals, necessary for a fair statement of the results of
operations and cash flows for the periods covered thereby.
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5.7 Financial Covenants
(a) Current Ratio. Company will have a ratio of current assets to
current liabilities of not less than .75:1 at the date of the first Advance, not
less than .85:1 at March 31, 1997, and not less than .9:1 at June 30, 1997.
(b) Tangible Net Worth. Company will have a minimum tangible net worth
(net book value minus intangible asset value) of $4,900,000 at the date of the
first Advance, $5,500,000 at March 31, 1997, and $6,200,000 at June 30, 1997.
(c) Cash Flow Coverage. Company will maintain a cash flow coverage
ratio, measured on a cumulative basis as of the end of each of Company's fiscal
quarters, of not less than 1.2:1. Cash flow coverage ratio shall mean, for the
relevant period, the ratio of (i) net income after taxes plus depreciation plus
amortization to (ii) the current portion of long-term debt plus dividends and
distributions plus internally funded cash capital expenditures.
5.8 Inspection. Company will keep accurate books and records relating
to its business at its corporate offices located in Portland, Oregon. Bank will
have the right to inspect all Company's financial records at all reasonable
times and to discuss with Company's accounting employees and outside
accountants such records and the Financial Statements. Bank will give prior
notice to Company of its intention to discuss such matters with Company's
outside accountants in order to provide Company the opportunity to be present
at such discussions. Bank will have the right to make extracts or photocopies
of all of Company's books and records. The phrase "books and records" is used
in its broadest sense, and it includes data compilations held on disks, tapes,
and other media. If such information is so stored, Company will provide the
hardware and disk operating systems necessary for retrieval, review, and
reprinting of such information.
5.9 Notice of Default. Company will notify Bank in writing immediately
if it becomes aware of the occurrence of any Event of Default or of any fact,
condition, or event that with the giving of notice or passage of time or both,
would become an Event of Default (an "incipient default") or if it becomes
aware of any material adverse change in the business prospects, financial
condition (including, without limitation, proceedings in bankruptcy,
insolvency, reorganization, or the appointment of a receiver or trustee), or
results of operations of Company or of the failure of Company to observe any of
its undertakings hereunder or under any other Loan Document. Such notice shall
include the manner and methods Company proposes, and any action Company has
taken, to cure the default or incipient default.
<PAGE> 14
SECTION 6
NEGATIVE COVENANTS OF COMPANY
At all times during the term of this Agreement and until payment in full
of the Note and performance of all obligations of Company under the Note and
this Agreement, Company will comply with the following negative covenants:
6.1 Change in Corporation. Company will not change its name, enter into
any merger, consolidation, reorganization, or recapitalization, or reclassify
its capital stock without the prior written consent of Bank, which consent will
not be unreasonably withheld.
6.2 Sale of Assets or Operations. Company will not sell, transfer, lease,
or otherwise dispose of all or (except in the ordinary course of business) any
material part of its assets. Company will not sell or otherwise dispose of, or
for any reason cease operating, any of its divisions, franchises, or lines of
business.
6.3 Negative Pledge. Company will not mortgage, assign, sell, transfer,
pledge, grant, or permit to exist any lien or security interest upon any of its
accounts receivable or currently unencumbered assets of any kind, now existing
or hereafter arising.
6.4 Accuracy of Information. Company will not furnish Bank any certificate
or other document that contains any untrue statement of material fact or that,
taken together with all other information furnished, omits to state a material
fact necessary to make it not misleading in light of the circumstances under
which it was furnished.
6.5 Margin Stock. Company will not directly or indirectly apply any part
of the proceeds of the Advances to the purchasing or carrying of any "margin
stock" within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System, or any regulations, interpretations, or rulings
thereunder.
6.6 Key Contracts. Company will not amend or terminate the Practice
Management Agreement between it and the PC Affiliates, or any subsequent
Practice Management Agreements it may enter into with other Person(s) without
the written consent of Bank, which consent shall not be unreasonably withheld.
SECTION 7
EVENTS OF DEFAULT
7.1 Events of Default. The occurrence of any of the following events
shall constitute an "Event of Default" hereunder:
(a) Any failure of Company to make any principal or interest payment on
the Note when due;
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(b) Any failure of Company to make any payments (other than as
specified in Section 7.1(a) under the Note or this Agreement when due and such
failure continues for more than 10 days after written notice thereof by Bank to
Company;
(c) Default (other than as stated in Section 7.1(a) and 7.1(b)
above) in the performance or observance by Company of any of the covenants,
agreements, terms, or promises contained in the Loan Documents and such default
is not remedied within 30 days after written notice thereof by Bank to Company;
(d) Any representation, warranty, covenant, statement, certificate,
or report made herein or furnished in connection with the Loan Documents proves
to have been false or misleading in any material respect as of the time made
or furnished;
(e) Any debt to third Persons for which Company is liable as
principal, guarantor, or otherwise becomes due by acceleration or formal demand
and is not promptly paid by Company or Company has been declared in default
under any agreement binding on it under which Company has borrowed money or
otherwise obtained an extension of credit from a lender other than Bank;
(f) Company defaults on any other present or future debt to Bank or
any Affiliate of Bank and such debt becomes due by acceleration or formal
demand;
(g) Company fails to meet its minimum funding requirements under
ERISA with respect to any plan, or any plan becomes the subject of voluntary or
involuntary termination proceedings which may result in a liability to the
Pension Benefit Guaranty Corporation in an amount which is material in
relation to Company's net worth;
(h) Company (i) applied for or consents to the appointment of, or
the taking of possession by, a receiver, custodian, trustee, or liquidator of
itself or of all or a substantial part of its property, (ii) admits in writing
its inability to pay, or generally not be paying, its debts as they become due,
(iii) makes a general assignment for the benefit of creditors, (iv) commences a
voluntary action under the Federal Bankruptcy Code (as now or hereafter in
effect), (v) files a petition seeking to take advantage of any other law
relating to bankruptcy, insolvency, reorganization, winding-up, or composition
or adjustment of debts, (vi) fails to controvert in a timely or appropriate
manner, or acquiesces or consents in writing to, any petition filed against it,
in an involuntary action under the Bankruptcy Code, or (vii) takes any
corporate action for the purpose of effecting any of the foregoing;
(i) Either (i) a proceeding or case is commenced against Company,
without its consent, in any court of competent jurisdiction, seeking the
liquidation, reorganization, dissolution, wind-up, or composition or
readjustment of the debts of Company, (ii) a receiver, trustee, custodian,
liquidator, or the like is appointed for Company, or for all or a substantial
part of its assets, or (iii) relief is granted to Company under any law
relating to bankruptcy, insolvency, reorganization, winding-up, or composition
or adjustment of debts, and such proceeding or case continues undismissed, or
an order, judgment, or decree
-15-
<PAGE> 16
approving or ordering any of the foregoing is entered and continues unstayed and
in effect for any period of 60 days, or an order for relief against Company is
entered in an involuntary case under the Bankruptcy Code; or
(j) Company suffers any material adverse change in its business
prospects, financial condition, or results of operations.
7.2 Bank's Rights and Remedies on Default. Without in any way
prejudicing Bank's demand rights under the Note, if any Event of Default
occurs and continues beyond any applicable cure period as stated in Section
7.1(b), (c), or (i), or if any Event of Default occurs under Section 7.1(a),
(e), (f), (g), (h), or (j), Bank may, at its option, do any one or more of the
following:
(a) Declare the Note and all other indebtedness of Company to Bank
forthwith due and payable, whereupon the same shall become forthwith due and
payable without further notice of any kind and without presentment, demand, or
protest, all of which are hereby expressly waived;
(b) Proceed to enforce Bank's rights against Company by any appropriate
proceeding, whether for the specific performance of, or for an injunction
against a violation of, any term hereof or promise herein, in the Note or in
any other Loan Document or in aid of the exercise of any power granted hereby
or thereby or by law;
(c) Exercise any rights of Bank under the Note;
(d) Set off any deposits or other sums due from Bank to Company against
Company's obligations under this Agreement, the Note, or any other Loan
Documents; or
(e) Take any other action permitted in any agreement with Company and
take any other action permitted by law.
7.3 Arbitration.
a. Either Bank or Company may require that all disputes, claims,
counterclaims, and defenses, including those based on or arising from any
alleged tort ("Claims") relating in any way to this Agreement, the Note, or any
transaction of which this Agreement is a part (the "Loan"), be settled by
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association and Title 9 of the U.S. Code. All Claims will
be subject to the statutes of limitation applicable if they were litigated.
This provision is void if the Loan, at the time of the proposed submission to
arbitration, is secured by real property located outside of Oregon or
Washington, or if the effect of the arbitration procedure (as opposed to any
Claims by Company) would be to materially impair Bank's ability to realize on
any collateral securing the Loan.
-16-
<PAGE> 17
b. If arbitration occurs and each party's Claim is less than $250,000,
one neutral arbitrator will decide all issues; if any party's Claim is more
than $250,000, three neutral arbitrators will decide all issues. All arbitrators
will be active Oregon State Bar members in good standing. All arbitration
hearings will be held in Portland, Oregon. In addition to all other powers, the
arbitrator(s) shall have the exclusive right to determine all issues of
arbitrability and shall have the authority to issue subpoenas. Judgment on any
arbitration award may be entered in any court with jurisdiction.
c. If either party institutes any judicial proceeding relating to the
Loan, such action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, whether or not the parties arbitrate any Claim, each
has the right before, during, and after any arbitration to exercise any number
of the following remedies, in any order or concurrently: (i) setoff; (ii)
self-help repossession of any collateral; (iii) judicial or non-judicial
foreclosure against any real or personal property collateral; and (iv)
provisional remedies, including injunction, appointment of receiver,
attachment, claim, and delivery and replevin.
d. This arbitration clause cannot be modified or waived by either party
except in writing, which writing must refer to this arbitration clause and be
signed by both Bank and Company.
7.4 Rights and Remedies Cumulative. All rights and remedies on this
Agreement and on the Notes are cumulative and in addition to any other remedy
Bank may have by agreement, at law, or in equity. Partial exercise of any right
or remedy shall not limit or restrict Bank's subsequent exercise of such right
or remedy nor shall its restrict Bank's contemporaneous or subsequent exercise
of any other right or remedy.
7.5 No Waiver. No failure to delay of Bank in exercising any right
hereunder shall operate as a waiver of that right or any other right. No
modification or waiver of any provision of this Agreement, the Note, or any
other document or agreement executed shall be effective unless in writing, and
then only in the specific instance and for the purpose given. No notice or
demand on Company shall entitle Company to any other notice or demand in other
similar circumstances.
7.6 Payment of Costs. Company agrees to pay Bank's reasonable costs and
disbursements (including reasonable attorney fees) incurred in documentation of
this Agreement and associated facilities assumed in or affected by the Merger.
In addition, in case of a default in the payment of any principal or interest
payment under the Note, or in case of a default under this Agreement, the Note,
or any other document or agreement executed hereunder, Company shall pay Bank's
reasonable costs and expenses incurred in connection therewith (including
reasonable attorney fees), and in the event litigation or arbitration is
commenced to enforce any term of any such agreement, the losing party will pay
to the prevailing party such amounts as shall be sufficient to cover the cost
and expense of collection or enforcement, including reasonable attorney fees
and costs at arbitration proceedings, trial, and on appeal.
- 17 -
<PAGE> 18
SECTION 8
MISCELLANEOUS
8.1 Survival. All agreements, representations, and warranties
contained herein or made in writing by Company or any of its officers in
connection with the transactions contemplated hereby shall survive the execution
and delivery of this Agreement, any investigation at any time made by Bank or on
its behalf, the making of the Loan, and the delivery of the Note. All statements
contained in any certificate or other instrument delivered by Company or any of
its officers pursuant hereto or in connection with the transactions contemplated
hereby shall be deemed representations and warranties of Company hereunder.
8.2 Notices. All communications pursuant to this Agreement shall be
made in writing by telecopy, hand delivery, or by U.S. First Class mail
addressed to the appropriate party at the address shown above. A communication
shall be effective, if given by telecopy, upon telecopy transmission to the
number shown above, with oral advice of transmission and a confirmation copy
sent by U.S. first class mail addressed to the appropriate party at the address
shown above. A communication shall be effective, if given by hand delivery,
upon delivery to the appropriate party's address shown above. A communication
shall be effective, if given by mail, when actually delivered at the address
specified in this section, or if delivery is refused or otherwise cannot be
made, then on the third day following the day when the communication, properly
addressed and postage prepaid was deposited in the U.S. mails.
8.3 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties, their successors, and permitted
assigns.
8.4 Governing Law. This Agreement, the Note, and any other documents
or agreements executed hereunder shall be governed by Oregon law.
8.5 Assignment and Participation. Company may not assign its rights
under the Note or this Agreement, nor delegate any duties or obligations
hereunder or under the Note without the prior written consent of Bank. Bank
may, at any time, transfer its commitment hereunder, to subsidiaries or
Affiliates, and may at any time assign, grant participation in, or otherwise
dispose of all or part of its rights and interests hereunder and under the Note.
8.6 Modification; Prior Agreements; Headings. This Agreement may not
be modified or amended except by an instrument in writing signed by Company and
Bank. This Agreement taken together with the other Loan Documents reflects and
sets forth the entire agreement and understanding of the parties, and
supersedes all prior agreements and understanding relating to the subject
matter hereof. The headings in this Agreement are for the purpose of reference
only and shall not limit or otherwise affect any of the terms hereof.
-18-
<PAGE> 19
8.7 Counterparts. This Agreement may be executed in any number
of counterparts, and any single counterpart or set of counterparts signed, in
either case, by all the parties hereto shall constitute a full and original
instrument, but all of which shall together constitute one and the same
instrument.
8.8 Statutory Notice. UNDER OREGON LAW, MOST AGREEMENTS,
PROMISES, AND OTHER COMMITMENTS MADE BY BANK AFTER OCTOBER 3, 1989, CONCERNING
LOANS OR OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY, OR
HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN
WRITING, EXPRESS CONSIDERATION, AND BE SIGNED BY BANK TO BE ENFORCEABLE.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers or agents thereunto duly authorized
effective as of the date first above written.
PHYSICIAN PARTNERS, INC.
By /s/ DAVID M. GOLDBERG
-------------------------------------
David M. Goldberg, President
UNITED STATES NATIONAL BANK OF OREGON
By /s/ AL MUNSON
-------------------------------------
Al Munson, Vice President
-19-
<PAGE> 20
CORPORATE RESOLUTION TO BORROW
<TABLE>
<CAPTION>
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
02-01-97
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: PHYSICIAN PARTNERS, INC. LENDER:UNITED STATES NATIONAL BANK
111 SW COLUMBIA STREET, OF OREGON
SUITE 725 CORPORATE BANKING DIVISION
PORTLAND, OR 97201 PL-7 OREGON COMMERCIAL LOAN SERVICING
555 S.W. OAK
PORTLAND, OR 97204
- --------------------------------------------------------------------------------
I, the undersigned Secretary of Assistant Secretary of PHYSICIAN PARTNERS, INC.
(the "Corporation"), HEREBY CERTIFY that the Corporation is organized and
existing under and by virtue of the laws of the State of Delaware as a
corporation for profit, with its principal office at 111 SW COLUMBIA STREET,
SUITE 725, PORTLAND, OR 97201, and is duly authorized to transact business in
the State of Oregon.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly
called and held on February 1, 1997, at which a quorum was present and voting,
or by other duly authorized corporate action in lieu of a meeting, the following
resolutions were adopted:
BE IT RESOLVED, that any one (1) of the following named officers, employees, or
agents of this Corporation, whose actual signatures are shown below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
- ---- --------- -----------------
<S> <C> <C>
Tim Dupell C.F.O. /s/ TIM DUPELL
David Goldberg CEO /s/DAVID GOLDBERG
</TABLE>
acting for and on behalf of the Corporation and as its act and deed be and they
hereby are authorized and empowered:
Borrow Money. To borrow from time to time from UNITED STATES NATIONAL BANK
OF OREGON ("Lender"), on such terms as may be agreed upon between the
Corporation and Lender, such sum or sums of money as in their judgment
should be borrowed, without limitation.
Execute Notes. To execute and deliver to Lender the promissory note or
notes, or other evidence of credit accomodations of the Corporation, on
Lender's forms, at such rates of Interest and on such terms as may be
agreed upon, evidencing the sums of money so borrowed or any indebtedness
of the Corporation to Lender, and also to execute and deliver to Lender one
or more renewals, extensions, modifications, refinancings, consolidations,
or substitutions for one or more of the notes, any portion of the notes, or
any other evidence of credit accomodations.
Grant Security. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the payment of
any loans or credit accomodations so obtained, any promissory notes so
executed (including any amendments to or modifications, renewals, and
extensions of such promissory notes), or any other or further indebtedness
of the Corporation to Lender at any time owing, however the same may be
evidenced, any property now or hereafter belonging to the Corporation or in
which the Corporation now or hereafter may have an interest, including
without limitation all real property and all personal property (tangible or
intangible) of the Corporation. Such property may be mortgaged, pledged,
transferred, endorsed, hypothecated, or encumbered at the time such loans
are obtained or such indebtedness is incurred, or at any other time or
times, and may be either in addition to or in lieu of any property
theretofore mortgaged, pledged, transferred, endorsed, hypothecated, or
encumbered.
Execute Security Documents. To execute and deliver to Lender the forms of
mortgage, deed of trust, pledge agreement, hypothecation agreement, and
other security agreements and financing statements which may be submitted
by Lender, and which shall evidence the terms and conditions under and
pursuant to which such liens and encumbrances, of any of them, are given;
and also to execute and deliver to Lender any other written instruments,
any entitled paper, or any other collateral, of any kind or nature, which
they may in their discretion deem reasonably necessary or proper in
connection with of pertaining to the giving of the liens and encumbrances.
Negotiate items. To draw, endorsed, and discount with Lender all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporation in which the Corporation may
have an interest, and either to receive cash for the same or to cause such
proceeds to be credited to the account of the Corporation with Lender, or
to cause such other disposition of the proceeds derived therefrom as they
may deem advisable.
Further Acts. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements as they may in their discretion deem reasonably necessary or
proper in order to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these Resolutions and hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Lender may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Lender. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect
at the time notice is given.
BE IT FURTHER RESOLVED, that the Corporation will notify Lender's address shown
above (or such other address as Lender may designate from time to time) prior
to any (a) change in the name of the Corporation, (b) change in the assumed
business name(s) of the Corporation, (c) change in the management of the
Corporation, (d) change in the authorized signer(s), (e) conversion of the
Corporation to a new or different type of business entity, or (f) change in any
other aspect of the Corporation that directly or indirectly relates to any
agreements between the Corporation and Lender. No change in the name of the
Corporation will take effect until after Lender has been notified.
I FURTHER CERTIFY that the officers, employees, and agents named above are duly
elected, appointed, or employed by or for the Corporation, as the case may be,
and occupy the positions set opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Corporation; and
that the Resolutions are in full force and effect and have not been modified or
revoked in any manner whatsoever. The Corporation has no corporate seal, and
therefore, no seal is affixed to this certificate.
IN TESTIMONY WHEREOF, I have hereunto set my hand on February 1, 1997 and
attest that the signatures set opposite the names listed above are their
genuine signatures.
CERTIFIED TO AND ATTESTED BY:
/s/ DAVID M. GOLDBERG
------------------------------
/S/ TIM DUPELL
------------------------------
NOTE: In case the Secretary or other certifying officer is designated by the
[ILLEGIBLE]
<PAGE> 21
PHYSICIAN PARTNERS, INC.
$7,500,000.00 Portland, Oregon
March 7, 1997
OPTIONAL ADVANCE
REVOLVING LINE OF CREDIT NOTE
For valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the undersigned ("Company") promises and agrees to pay to the
order and assigns of United States National Bank of Oregon ("Bank") at Oregon
Corporate Banking, 111 S.W. Fifth Avenue, Suite 400, P.O. Box 4412, Portland,
Oregon 97208 (or at such other address as Bank may hereafter specify in writing
from time to time): (1) on the earlier of demand or June 30, 1997, the total
unpaid principal amount, not to exceed Seven Million Five Hundred Thousand
Dollars, advanced by Bank from time to time under this Note, (2) on the earlier
of demand or monthly, interest on the outstanding balance of all advances under
this Note at either the Prime Rate or the IBOR Rate plus 200 basis points, as
designated by Company in accordance with and at the time and on the terms
described in the Credit Agreement dated as of February 1, 1997, between Company
and Bank (as amended from time to time, the "Loan Agreement"), and (3) when and
as due, fees, costs, and disbursements provided for in the Loan Agreement and
this Note.
This Note is a revolving loan note, so amounts may be borrowed, repaid,
and reborrowed, provided that all advances under this Note shall be at the sole
discretion of Bank. In addition, no amounts shall be advanced under this Note
if, as a result of such advance, the total principal amount outstanding under
this Note would exceed $7,500,000. No advance shall be made under this Note
after June 30, 1997. Unless payment in full shall have been previously demanded
or made, Company shall pay the entire outstanding principal amount together
with all accrued interest on this Note, on June 30, 1997.
Repayment of the indebtedness evidenced by this Note is secured by the
collateral granted in the Security Agreement and is subject to prepayment and
acceleration pursuant to, and could otherwise become governed by, the terms of
the Loan Agreement and the agreements and instruments required thereunder.
Capitalized terms used herein and not otherwise defined shall have the
respective meanings ascribed thereto in the Loan Agreement.
-1-
<PAGE> 22
Company also promises and agrees to pay on demand the costs and
disbursements, including reasonable attorney fees, incurred by Bank in
collecting this Note and/or in foreclosing on the collateral securing payment
of this Note, whether or not a civil action, arbitration proceeding, or
insolvency proceeding or claim is commenced, tried, or appealed, plus interest
thereon at the Prime Rate from the date of the demand until payment is
received.
Company hereby waives acceptance, presentment, demand, diligence,
protest, nonpayment, dishonor, and notice of any of the foregoing and consents
to impairment of subrogation rights and of collateral. Company acknowledges
that forbearance by Bank, including any failure to make demand or other failure
by Bank to exercise any right or remedy upon demand or default, shall not
constitute a waiver or grounds for a claim of estoppel.
STATUTORY NOTICE: Under Oregon law, most agreements, promises, and
commitments made by Lender after October 3, 1989, concerning loans and
other credit extensions which are not for personal, family, or household
purposes or secured solely by the borrowers' residence must be in writing,
express consideration, and be signed by Lender to be enforceable.
PHYSICIAN PARTNERS, INC.
By: /s/ DAVID M. GOLDBERG
----------------------------
David M. Goldberg, President
<PAGE> 23
AMENDMENT TO CREDIT AGREEMENT
Dated effective: August 25, 1997
Parties: PHYSICIAN PARTNERS, INC. ("Borrower")
And: UNITED STATES NATIONAL BANK OF OREGON ("Bank")
Recitals:
A. Bank has extended credit to Borrower pursuant to the terms of a Credit
Agreement dated as of February 1, 1997 ("Credit Agreement").
B. The parties wish to amend the Credit Agreement as set forth in this
Amendment.
C. Capitalized terms not otherwise defined herein shall have the meanings
given to them in the Credit Agreement.
The parties therefore agree as follows:
1. DEFINITIONS. Definitions for the words "Business Day", "IBOR Rate", "IBOR
Rate Loan" and "Note" are hereby deleted and the following definitions are added
to Section 1.
1.1 " "Business Day" means any day other than a Saturday, Sunday, or other
day that commercial banks in Portland, Oregon or New York City are authorized or
required by law to close; provided, however that when used in connection with a
LIBOR Rate, LIBOR Rate Loan or LIBOR Interest Period such term shall also
exclude any day on which dealings in U.S. dollar deposits are not carried on in
the London interbank market.
1.2 " "Capital Lease" means any lease which has been or should be
capitalized on the books of the lessee in accordance with GAAP."
1.3 " "Funded Debt" means (a) all obligations evidenced by notes, bonds,
debentures or similar instruments and all other indebtedness with respect to
borrowed money; (b) all obligations as lessee under Capital Leases; (c) all
obligations for the deferred purchase price of any property or assets (excluding
short term trade payables incurred in the ordinary course of business and not
more than 90 days past due); and (d) all obligations under conditional sales
contracts or other title retention agreements, other than operating leases."
1.4 " "LIBOR Borrowing Rate" means, for any specified LIBOR Interest
Period, the LIBOR Rate plus the applicable Margin."
-1-
<PAGE> 24
1.5 " 'LIBOR RATE' means, for any LIBOR Interest Period, the rate per
annum (computed on the basis of a 360-day year and the actual number of days
elapsed and rounded upward to the nearest 1/16 of 1%) established by Bank as its
LIBOR Rate, based on Bank's determination, on the basis of such factors as Bank
deems relevant, of the rate of interest at which U.S. dollar deposits would be
offered to U.S. Bank in the London interbank market at approximately 11 a.m.
London time on the date which is two Business Days prior to the first day of
such LIBOR Interest Period for delivery on the first day of such LIBOR Interest
Period for the number of months therein; provided, however, that the LIBOR Rate
shall be adjusted to take into account the maximum reserves required to be
maintained for Eurocurrency liabilities by banks during such LIBOR Interest
Period as specified in Regulation D of the Board of Governors of the Federal
Reserve System or any successor regulation."
1.6 " 'LIBOR Rate Loan' means an Advance for which Company has selected a
LIBOR Rate."
1.7 " 'Margin' means (a) for the period from the closing date through
September 30, 1997, 1.60 percent for the LIBOR Borrowing Rate; and (b)
thereafter, the percentage per annum set forth below opposite the Maximum Funded
Debt/EBITDAR Ratio.
<TABLE>
<CAPTION>
Commitment Fee
Maximum Funded Debt/EBITDAR Ratio LIBOR Margin Margin
--------------------------------- ------------ ------
<S> <C> <C>
Greater than 2.00 to 1.0 1.85% .375%
Equal to or less than 2.0 to 1.0
or greater than 1.5 to 1.0 1.60% .25%
Equal to or less than 1.5 to 1.0 1.25% .25%
</TABLE>
The Margin shall be determined as of the last day of each fiscal quarter based
upon the compliance certificate furnished not later than the time set forth in
Section 5.6 and shall be applicable to the LIBOR Borrowing Rate as of the first
day of any LIBOR Interest period commencing after such time; provided however,
that if any compliance certificate is not timely furnished to Bank and a default
rate is not applicable, the Margin shall automatically increase, as of the time
set forth above to the highest rate set forth herein."
1.8 " 'Note' means the promissory note described in Section 2.1(b)."
1.9 " 'Unfunded Capital Expenditures' means for any time period the sum of
the purchase price of all fixed assets acquired during such time period minus
the sum of all long-term debt (whether payable to the Seller or any other
person) incurred to finance the acquisition of such fixed assets."
2. LINE OF CREDIT. The first sentence of Section 2.1 is hereby deleted and the
following is substituted therefor:
-2-
<PAGE> 25
"Bank agrees, on the terms and conditions of this Agreement and the Note,
to make loans and advances of credit ("Advances") to Company from time to
time on Business Days during the period commencing on the date of this
Agreement and ending on July 31, 1999 (the "Commitment Period"), in an
aggregate amount not exceeding at any one time $15,000,000."
3. TERMS. All references to the terms "IBOR", "IBOR Rate Loan" and "IBOR
Rate" contained in the Credit Agreement are deleted and the terms "LIBOR",
"LIBOR Rate Loan" and "LIBOR Rate" are substituted therefor.
4. MANNER OF BORROWING. The fifth sentence of Section 2.1(a) is hereby
deleted and the following is substituted therefor:
"LIBOR Rate Advances shall be in the amount of $500,000, plus additional
increments of $500,000."
5. NOTE. Exhibit B referred to in Section 2.1(b) is hereby replaced with
Exhibit B attached hereto.
6. INTEREST RATE. Clause (ii) of Section 2.1(d) is hereby deleted and the
following is substituted therefor: "(ii) the LIBOR Borrowing Rate with respect
to LIBOR Rate Loans."
7. INTEREST PERIOD. The words "three, or six" and "third, or sixth" are
deleted from the second sentence in Section 2.1(e) and replaced with "or three"
and "or third", respectively.
8. FACILITY LOAN FEE. The following is added to Section 3.1(c):
"Bank shall have received payment of a facility loan fee of $90,000,
payable in installments of $11,250, the first of which is due upon
execution of this Amendment. The remaining payments shall be due on
November 1, 1997, February 1, 1998, May 1, 1998, August 1, 1998, November
1, 1998, February 1, 1999 and May 1, 1999, respectively. Bank shall have
received payment of a commitment fee on the unused portion of the Line of
Credit based on the applicable Commitment Fee Margin set forth in the
definition of Margin, payable quarterly in arrears beginning October 30,
1997."
9. CONDITIONS TO ACQUISITION. The following Section 3.2 is added to the
Credit Agreement:
"3.2 Conditions to Acquisitions. In addition to the conditions contained
in Section 3.1, the obligation of Bank to make any Advance under the Loan
for the purpose of making an acquisition in the physician practice
management industry is subject to fulfillment of the following conditions:
-3-
<PAGE> 26
(a) Borrower is in compliance with all terms and conditions of the
credit agreement.
(b) Bank shall have received pro forma financials that include the
proposed acquisition and reflect Borrower's continued compliance
with the financial covenants contained herein.
(c) No more than three acquisitions may be undertaken in any twelve
month period."
10. FINANCIAL COVENANTS. Section 5.7 is deleted in its entirety and the
following is substituted therefor:
"5.7 Financial Covenants.
(a) Maximum Funded Debt/EBITDAR Ratio. Company will maintain a
maximum funded debt/EBITDAR ratio of not more than 3.0 to 1.0.
This ratio shall be measured quarterly. For purposes of
calculating this ratio: a) as of June 30, 1997, EBITDAR shall be
an amount equal to EBITDAR for such fiscal quarter multiplied by
four, b) as of September 30, 1997, EBITDAR shall be an amount
equal to EBITDAR for the two consecutive fiscal quarters ending
on such date multiplied by two; c) as of December 31, 1997,
EBITDAR shall be an amount equal to EBITDAR for the three
consecutive fiscal quarters ending on such date multiplied by
1.333; and d) as of March 31, 1998, and the last day of each
fiscal quarter thereafter for the four consecutive fiscal
quarters ending on such day of each fiscal quarter thereafter
for the four consecutive fiscal quarter period ending on such
date. Funded debt/EBITDAR ratio shall mean, for the relevant
period, the ratio of (i) all liabilities for borrowed money plus
all Capital Lease obligations to (ii) earnings before interest,
income taxes, depreciation, amortization and rental/lease
expense ("EBITDAR").
(b) EBITDAR/Interest and Lease Expense Ratio. Company will maintain
an EBITDAR/interest and lease expense ratio of not less than 1.8
to 1.0 as of the last day of the fiscal quarter ending December
31, 1997 and 2.0 to 1.0 on the last day of each fiscal quarter
thereafter. EBITDAR/interest and lease expense ratio shall mean,
for the relevant period, the ratio of (i) EBITDAR to (ii)
interest plus leases and rents.
(c) Capital Expenditures. Company shall not make Unfunded Capital
Expenditures which exceed $3,000,000 (a) from the date of this
amendment through December 31, 1997, and (b) $4,000,000 in any
fiscal year thereafter.
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<PAGE> 27
(d) Total Debt/Total Capital Ratio. Company will maintain a ratio
of (a) Funded Debt to (b) the sum of (i) Funded Debt plus (ii)
shareholder's equity of not more than .70 to 1.0 as of the last
day of the fiscal quarter ending December 31, 1997. Thereafter
the ratio shall be .60 to 1.0."
11. REAFFIRMATION. Borrower acknowledges and agrees to all terms and
conditions of this agreement and reaffirms the representations and warranties
in each of the documents executed by Borrower, in connection with any
indebtedness of Borrower to Bank ("Documents"). Borrower acknowledges and
agrees that: (a) except as amended previously or herein, each Document is and
shall remain valid and enforceable in accordance with its terms and (b) it
does not have any defenses, setoffs, counterclaims or claims for recoupment
against the indebtedness represented by such Documents.
12. NO OTHER MODIFICATIONS. The parties agree that except as modified
previously or by this instrument, all of the terms and provisions of the Credit
Agreement shall remain in full force and effect.
13. STATUTORY DISCLOSURE. BY OREGON STATUTE (ORS 41.580), THE FOLLOWING
DISCLOSURE SHALL BE MADE:
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY LENDERS
AFTER OCTOBER 31, 1989, CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE
NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE
BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY
THE LENDER TO BE ENFORCEABLE.
14. RECEIPT. Borrower acknowledges receipt of a completed copy of this
Agreement.
PHYSICIAN PARTNERS, INC. UNITED STATES NATIONAL BANK OF
OREGON
By: /s/ TIM DUPELL By: AL MUNSON
--------------------------------- ------------------------------
Tim Dupell, C.F.O., Secretary and Al Munson, Vice President
Treasurer
-5-
<PAGE> 28
EXHIBIT B
PHYSICIAN PARTNERS, INC.
$15,000,000 Portland, Oregon
August 25, 1997
OPTIONAL ADVANCE
REVOLVING LINE OF CREDIT NOTE
For valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the undersigned ("Company") promises and agrees to pay to the
order and assigns of United States National Bank of Oregon ("Bank") at Oregon
Corporate Banking, 111 S.W. Fifth Avenue, Suite 400, P.O. Box 4412, Portland,
Oregon 97208 (or at such other address as Bank may hereafter specify in writing
from time to time): (1) on July 31, 1999, the total unpaid principal amount, not
to exceed Fifteen Million Dollars, advanced by Bank from time to time under this
Note, (2) monthly, interest on the outstanding balance of all advances under
this Note at either the Prime Rate or the LIBOR Borrowing Rate, as designated by
Company in accordance with and at the time and on the terms described in the
Credit Agreement dated as of February 1, 1997, between Company and Bank and
amended August 25, 1997 (as further amended from time to time, the "Loan
Agreement"), and (3) when and as due, fees, costs, and disbursements provided
for in the Loan Agreement and this Note.
This Note is a revolving loan note, so amounts may be borrowed, repaid,
and reborrowed. In addition, no amounts shall be advanced under this Note if,
as a result of such advance, the total principal amount outstanding under this
Note would exceed $15,000,000. No advance shall be made under this Note after
July 31, 1999. Unless payment in full shall have been previously demanded or
made, the Company shall pay the entire outstanding principal amount, together
with all accrued interest on this Note, on July 31, 1999.
Repayment of the indebtedness evidenced by this Note is secured by the
collateral granted in the Security Agreement and is subject to prepayment and
acceleration pursuant to, and could otherwise become governed by, the terms of
the Loan Agreement and the agreements and instruments required thereunder.
Capitalized terms used herein and not otherwise defined shall have the
respective meanings ascribed thereto in the Loan Agreement.
Company also promises and agrees to pay on demand the costs and
disbursements, including reasonable attorney fees, incurred by Bank in
collecting this Note and/or in foreclosing on the collateral securing payment
of this Note, whether or not a civil action, arbitration proceeding, or
insolvency proceeding or claim is commenced, tried, or appealed, plus interest
thereon at the prime Rate from the date of the demand until payment is received.
-1-
<PAGE> 29
Company hereby waives acceptance, presentment, demand, diligence, protest,
nonpayment, dishonor, and notice of any of the foregoing and consents to
impairment of subrogation rights and of collateral. Company acknowledges that
forbearance by Bank, including any failure to make demand or other failure by
Bank to exercise any right or remedy upon demand or default, shall not
constitute a waiver or grounds for a claim of estoppel.
STATUTORY NOTICE; UNDER OREGON LAW, MOST AGREEMENTS, PROMISES, AND
COMMITMENTS MADE BY LENDER AFTER OCTOBER 3, 1989, CONCERNING LOANS AND
OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY, OR HOUSEHOLD
PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING,
EXPRESS CONSIDERATION, AND BE SIGNED BY LENDER TO BE ENFORCEABLE.
PHYSICIAN PARTNERS, INC.
By: /s/ TIM DUPELL
-------------------------------
Tim Dupell, C.F.O.,
Secretary and Treasurer
-2-
<PAGE> 1
EXHIBIT 10.5
Execution Copy
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), is made and entered into
as of this day of December, 1997, effective as of February 9, 1998 (the
"Effective Date") by and between Physician Partners, Inc., a Delaware
corporation (the "Company"), and Kerry Barnett (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;
WHEREAS, Executive is an experienced business manager who is capable of
being the senior executive of a medical group such as HealthFirst, P.C. (the
"Medical Group");
WHEREAS, Company is a physician practice management company experienced
in management of medical practices such as Medical Group;
WHEREAS, Company wishes to employ Executive to oversee the operations of
Medical Group as part of the management of the practice of Medical group by
Company; and
WHEREAS, Executive and Company deem it to be in their respective best
interests to enter into an agreement to set forth the terms and conditions of he
employment of Executive after the Effective Date;
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein, it is hereby agreed as follows:
1. Duties. The Company hereby agrees to employ Executive as CEO of
HealthFirst Medical Group 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 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. Beginning on the Effective Date Company agrees
to pay to Executive base salary at an annual rate of One Hundred Fifty-Eight
Thousand Dollars ($158,000) payable in regular installments in accordance with
the Company's normal payroll procedures (the "Base Salary"). Executive's Base
Salary may be increased from time to time at the discretion of the Chief
Executive Officer of the Company.
<PAGE> 2
(b) Annual Incentive. Effective on the Effective 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). 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 Medical Group, 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 1998 fiscal year, the incentive standards and
target goals for Executive shall be mutually agreed upon by Executive and the
Company and submitted to the Compensation Committee of the Board of Directors
(the "Committee") within sixty (60) days after the Effective Date (and when
approved shall be included as Exhibit A of this Agreement) and Executive shall
be entitled to receive a bonus award not less than Thirty-two thousand dollars
($32,000) assuming achievement of the agreed upon financial standards of
performance (as determined based on the approved Medical Group operating budget)
and 100% of the agreed upon non-financial objectives. No bonus award for the
1998 fiscal year shall be awarded if Executive fails to achieve at least 85% of
the agreed upon non-financial objectives. The Company will review Executive's
performance from time to time and assuming satisfactory performance, additional
bonus awards as the Company may determine in its sole discretion may be made.
(c) Long-Term Incentives. As soon as practicable after the date
hereof and upon the execution of a Stock Option Agreement by Executive,
Executive shall be granted an option to purchase 10,000 shares of Class A Common
Stock of the Company at Eight Dollars ($8.00) per share subject to the terms and
conditions of (the PPI Employee Stock Option Plan-Exhibit B to this Agreement).
The option shall vest and become exercisable with respect to twenty percent
(20%) of the shares subject to the option as of each of the first through fifth
anniversaries of the Effective Date, provided that Executive is still employed
on each such anniversary. The Committee will review Executive's performance from
time to time and assuming satisfactory performance, may make additional awards
of long term incentives in such form and in such amounts as the Committee may
determine in its sole discretion.
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 (a copy of the 1998
benefit plan is attached as Exhibit C of this Agreement);
(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 the
Company, including, without limitation, reasonable business expenses,
entertaining expenses, automobile
2
<PAGE> 3
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 Effective Date and ending three (3)
years from the Employment 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. 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 six (6) month 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) failure to render services in accordance with the
terms of this Agreement and in a manner that meets the performance standards
mutually agreed upon between Executive and the Chief Executive Officer of the
Company, 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;
(iv) conviction of or plea of guilty or nolo contendere to
a felony; or
3
<PAGE> 4
(v) failure to comply with the Corporate Code of Conduct
established by the Company and attached hereto as Exhibit D, as such Corporate
Code of Conduct is modified from time to time by the Company.
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.
(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 six (6) months following Executive's death or until the
end of the Term of Employment, whichever is sooner. Alternatively, the Company
may provide key man life insurance covering Administrator providing amounts to
the Designated Beneficiaries equivalent to those specified in the previous
sentence.
(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. 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.
4
<PAGE> 5
6. 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),
5
<PAGE> 6
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.
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.
By______________________________
David M. Goldberg,
President
Executive:
By:__________________________
Kerry Barnett
AGREED AND ACKNOWLEDGED:
HealthFirst, P.C.
By: _______________________
David L. Perry, M.D.
President
6
<PAGE> 1
EXECUTION COPY
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), is made and entered into
as of the 1st day of June, 1997, by and between Physician Partners, Inc., a
Delaware corporation (the "Company"), and Ralph Prows, 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 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 "Employment Date")
of employment as Senior Vice President and PPI-Corvallis Clinic Chief Executive,
the Company agrees to pay to Executive a base salary during the Term of
Employment equal to one hundred seventeen percent (117%) of Average Shareholder
Income (ASI) for the Corvallis Clinic PC Shareholders, per year ("Base Salary"),
payable in regular installments in accordance with the Company's normal payroll
procedures. As of the Employment date Executive's Base Salary (annual) will be
$162,650. If Any increase or decrease in ASI will cause a quarterly adjustment
to Executive's Base Pay. Executive's Base Salary shall be increased at the
discretion of the Compensation Committee of the Board of Directors of the
Company (the "Committee") in consultation with the Corvallis Clinic Joint
Management Board and Chief Operating Officer of PPI.
(b) Annual Incentive. 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
<PAGE> 2
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 and Executive shall
be entitled to receive a bonus award 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
(c) Long-Term Incentives. Effective on the Employment 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 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 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.
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 an 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. In addition, Executive shall receive two additional paid weeks for
Continuing Medical Education and a sum not to exceed $3,600 per year for CME
related expenses. All requests for CME leave must however be approved in advance
by the Company and the President of the Corvallis Clinic, P.C; and
(d) Company will reimburse Executive for reasonable business
expenses in performing Executive's duties and promoting the business of the
Company, including, without limitation, reasonable business expenses in
performing Executive's duties and promoting the business of the 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.
<PAGE> 3
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 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
<PAGE> 4
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
Exeuctive pursuant to Section
(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 attorney's 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
<PAGE> 5
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"
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.
<PAGE> 6
(i) The Company shall, to the maximum extent permitted by law,
indemnify Executive against expenses (including, without limitation, reasonable
attorneys' fees), judgements, 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.
IN WITNESS WHEREOF, the parties hereto have read, understood, and
voluntarily executed this Agreement as of the day and year first above written.
EXECUTIVE: PHYSICIAN PARTNERS, INC.
______________________________ By:__________________________
RALPH PROWS, M.D.
AGREED AND ACKNOWLEDGED:
THE CORVALLIS CLINIC, P.C.
By: ________________________
Title
<PAGE> 1
AMENDED AND RESTATED 1997 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS OF
PHYSICIAN PARTNERS, INC.
R E C I T A L S:
The purpose of this Amended and Restated 1997 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 the effective
time (the "Effective Date") of the transaction contemplated under the Amended
and Restated Agreement and Plan of Reorganization and Merger, dated as of
September 19, 1996, as amended on November 4, 1996, November 29, 1996 and
December 31, 1996 (referred to herein, as so amended, as the "Reorganization and
Merger Agreement").
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, (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
<PAGE> 2
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, an as used herein, the fair market value of
the Company's Common Stock shall be determined as follows:
(a) 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;
(b) 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);
(c) in the absence of an established market for the stock, the
fair market value shall be determined in "good faith" by the Board of
Directors of the Company or a committee thereof, 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.
1.02. Options. The Options granted hereunder shall be options that are
not qualified under Section 422 of the Code.
<PAGE> 3
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 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"). Failure of the grantee to execute a stock option
agreement shall not void or invalidate the grant of any Option; the Option may
not be exercised, however, until the stock option agreement is executed. The
stock option 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:
<PAGE> 4
(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,
each person who becomes a non-affiliated director shall be automatically granted
on the date of appointment as a director and without further action of the Board
of Directors or the stockholders of the Company, an Option to purchase the
Common Stock under the Plan. In addition, 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 Amended and Restated 1997 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; provided, however, that any
non-affiliated director (other than the non-affiliated directors who were
serving as directors on the Effective Date) who became a director after January
1 shall be granted (i) on such date, an Option to purchase 7,500 shares of
Common Stock and (ii) on January 1 of the next succeeding year, an Option to
purchase (instead of 7,500 shares of Common Stock under paragraph (a) of this
Section 3.02) such number of shares of Common Stock as is equal to the product
of 7,500 multiplied by a fraction, the numerator of which is the number of days
from the date such director became a director until December 31 of the same
calendar year and the denominator of which is 365. The Board of Directors shall
determine the number of shares of Common Stock 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.
<PAGE> 5
(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
<PAGE> 6
(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 or a longer period as the Board of Directors of the
Company may determine in its sole discretion, 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 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-fourth (1/4) of the shares subject to the Option
as of the last business day of March, June, September and December (each, a
"Vesting Date") of the year of grant, provided that with respect to any
non-affiliated director
<PAGE> 7
(other than the non-affiliated directors who were serving as directors on the
Effective Date) who became a director after January 1, the initial Vesting Date
shall be the second succeeding Vesting 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. Notwithstanding any contrary
<PAGE> 8
waiting period or installment period in any stock option agreement or in the
Plan, each outstanding Option granted under the Plan shall become exercisable in
full for the aggregate number of shares covered thereby, in the event (a) the
Board of Directors (or, if approval of the Board of Directors is not required as
a matter of law, the stockholders of the Company) shall approve (i) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of Common Stock
would be converted into cash, securities or other property, other than any
merger of the Company in which the holders of Common Stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after such merger, (ii) any sale, lease,
exchange, or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company or
(iii) the adoption of any plan or proposal for the liquidation or dissolution of
the Company, or (b) any person (as such term is defined in Sections 13(d)(3) and
14(d)(2) of the Securities Exchange Act of 1934, as amended from time to time
(the "Exchange Act")), corporation or other entity (other than the Company or
any employee benefit plan sponsored by the Company or any subsidiary of the
Company) (i) shall purchase any Common Stock of the Company (or securities
convertible into the Company's Common Stock) for cash, securities or any other
consideration pursuant to a tender offer or exchange offer, without the prior
consent of the Board of Directors and (ii) shall become the "beneficial owner"
(as such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20 percent or more of the
combined voting power of the then outstanding securities of the Company
ordinarily (and apart from rights accruing under special circumstances) having
the right to vote in the election of directors (calculated as provided in
paragraph (d) of such Rule 13d-3 in the case of rights to acquire the Company's
securities), or (c) during any period of two consecutive years, individuals who
at the beginning of such period constitute the entire Board of Directors shall
cease for any reason to constitute a majority thereof unless the election, or
the nomination for election by the Company's stockholders, of each new director
was approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period. Any transaction
referred to in the foregoing clause (a) is herein called an Approved
Transaction, any purchase pursuant to a tender offer or exchange offer or
otherwise as described in the foregoing clause (b) is herein called a Control
Purchase and the cessation of individuals constituting a majority of the Board
as described in the foregoing clause (c) is herein called a Board Change.
ARTICLE V
GENERAL PROVISIONS
5.01. Termination of Plan. The Plan shall terminate
<PAGE> 9
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 January
31, 1997.
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.
5.06 Governing Law. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
<PAGE> 1
EXHIBIT 10.10
AMENDED AND RESTATED 1997 STOCK OPTION PLAN
FOR EMPLOYEES OF
PHYSICIAN PARTNERS, INC.
1. PURPOSE OF THE PLAN
The Amended and Restated 1997 Stock Option Plan for Employees of
Physician Partners, Inc. (the "Plan") was established by Physician Partners,
Inc. (the "Company"), effective as of the effective time (the "Effective Date")
of the transaction contemplated under the Amended and Restated Agreement and
Plan of Reorganization and Merger, dated as of September 19, 1996, as amended on
November 4, 1996, November 29, 1996 and December 31, 1996 (referred to herein,
as so amended, as the "Reorganization and Merger Agreement") 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
<PAGE> 2
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.
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
<PAGE> 3
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
<PAGE> 4
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. Notwithstanding any contrary waiting
period or installment period in any Option Agreement or in the Plan,
each outstanding Option granted under the Plan shall become exercisable
in full for the aggregate number of shares covered thereby, in the event
(a) the Board of Directors (or, if approval of the Board of Directors is
not required as a matter of law, the stockholders of the Company) shall
approve (i) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to
which shares of Common Stock would be converted into cash, securities or
other property, other than any merger of the Company in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after such merger, (ii) any sale, lease, exchange, or other
transfer (in one transaction or a series of related transactions) of
all, or substantially all, of the assets of the Company or (iii) the
adoption of any plan or proposal for the liquidation or dissolution of
the Company, or (b) any person (as such term is defined in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended
from time to time (the "Exchange Act")), corporation or other entity
(other than the Company or any employee benefit plan sponsored by the
Company or any subsidiary of the Company) (i) shall purchase any Common
Stock of the Company (or securities convertible into the Company's
Common Stock) for cash, securities or any other consideration pursuant
to a tender offer or exchange offer, without the prior consent of the
Board of Directors and (ii) shall become the "beneficial owner" (as such
term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20 percent or more
of the combined voting power of the then outstanding securities of the
Company ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors
(calculated as provided in paragraph (d) of such Rule 13d-3 in the case
of rights to acquire the Company's securities), or (c) during any period
of two consecutive years, individuals who at the beginning of such
period constitute the entire Board of Directors shall cease for any
reason to constitute a majority thereof unless the
<PAGE> 5
election, or the nomination for election by the Company's stockholders,
of each new director was approved by a vote of at least two-thirds of
the directors then still in office who were directors at the beginning
of the period. Any transaction referred to in the foregoing clause (a)
is herein called an Approved Transaction, any purchase pursuant to a
tender offer or exchange offer or otherwise as described in the
foregoing clause (b) is herein called a Control Purchase and the
cessation of individuals constituting a majority of the Board as
described in the foregoing clause (c) is herein called a Board Change.
(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
<PAGE> 6
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 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
<PAGE> 7
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.
(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
<PAGE> 8
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
<PAGE> 9
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 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.
<PAGE> 10
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 as of the Effective Time; provided,
that the Plan is approved by the affirmative votes of the holders of a majority
of the share of Class A Common Stock
<PAGE> 11
present, or represented, and entitled to vote at a meeting of the stockholders
duly held not later than January 31, 1997.
<PAGE> 12
AMENDED AND RESTATED 1997 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS OF
PHYSICIAN PARTNERS, INC.
R E C I T A L S:
The purpose of this Amended and Restated 1997 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 the effective
time (the "Effective Date") of the transaction contemplated under the Amended
and Restated Agreement and Plan of Reorganization and Merger, dated as of
September 19, 1996, as amended on November 4, 1996, November 29, 1996 and
December 31, 1996 (referred to herein, as so amended, as the "Reorganization and
Merger Agreement").
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, (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
<PAGE> 13
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, an as used herein, the fair market value of
the Company's Common Stock shall be determined as follows:
(a) 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;
(b) 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);
(c) in the absence of an established market for the stock, the
fair market value shall be determined in "good faith" by the Board of
Directors of the Company or a committee thereof, 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.
1.02. Options. The Options granted hereunder shall be options that are
not qualified under Section 422 of the Code.
<PAGE> 14
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 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"). Failure of the grantee to execute a stock option
agreement shall not void or invalidate the grant of any Option; the Option may
not be exercised, however, until the stock option agreement is executed. The
stock option 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:
<PAGE> 15
(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,
each person who becomes a non-affiliated director shall be automatically granted
on the date of appointment as a director and without further action of the Board
of Directors or the stockholders of the Company, an Option to purchase the
Common Stock under the Plan. In addition, 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 Amended and Restated 1997 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; provided, however, that any
non-affiliated director (other than the non-affiliated directors who were
serving as directors on the Effective Date) who became a director after January
1 shall be granted (i) on such date, an Option to purchase 7,500 shares of
Common Stock and (ii) on January 1 of the next succeeding year, an Option to
purchase (instead of 7,500 shares of Common Stock under paragraph (a) of this
Section 3.02) such number of shares of Common Stock as is equal to the product
of 7,500 multiplied by a fraction, the numerator of which is the number of days
from the date such director became a director until December 31 of the same
calendar year and the denominator of which is 365. The Board of Directors shall
determine the number of shares of Common Stock 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.
<PAGE> 16
(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
<PAGE> 17
(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 or a longer period as the Board of Directors of the
Company may determine in its sole discretion, 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 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-fourth (1/4) of the shares subject to the Option as of
the last business day of March, June, September and December (each, a "Vesting
Date") of the year of grant, provided that with respect to any non-affiliated
director
<PAGE> 18
(other than the non-affiliated directors who were serving as directors on the
Effective Date) who became a director after January 1, the initial Vesting Date
shall be the second succeeding Vesting 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. Notwithstanding any contrary
<PAGE> 19
waiting period or installment period in any stock option agreement or in the
Plan, each outstanding Option granted under the Plan shall become exercisable in
full for the aggregate number of shares covered thereby, in the event (a) the
Board of Directors (or, if approval of the Board of Directors is not required as
a matter of law, the stockholders of the Company) shall approve (i) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of Common Stock
would be converted into cash, securities or other property, other than any
merger of the Company in which the holders of Common Stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after such merger, (ii) any sale, lease,
exchange, or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company or
(iii) the adoption of any plan or proposal for the liquidation or dissolution of
the Company, or (b) any person (as such term is defined in Sections 13(d)(3) and
14(d)(2) of the Securities Exchange Act of 1934, as amended from time to time
(the "Exchange Act")), corporation or other entity (other than the Company or
any employee benefit plan sponsored by the Company or any subsidiary of the
Company) (i) shall purchase any Common Stock of the Company (or securities
convertible into the Company's Common Stock) for cash, securities or any other
consideration pursuant to a tender offer or exchange offer, without the prior
consent of the Board of Directors and (ii) shall become the "beneficial owner"
(as such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20 percent or more of the
combined voting power of the then outstanding securities of the Company
ordinarily (and apart from rights accruing under special circumstances) having
the right to vote in the election of directors (calculated as provided in
paragraph (d) of such Rule 13d-3 in the case of rights to acquire the Company's
securities), or (c) during any period of two consecutive years, individuals who
at the beginning of such period constitute the entire Board of Directors shall
cease for any reason to constitute a majority thereof unless the election, or
the nomination for election by the Company's stockholders, of each new director
was approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period. Any transaction
referred to in the foregoing clause (a) is herein called an Approved
Transaction, any purchase pursuant to a tender offer or exchange offer or
otherwise as described in the foregoing clause (b) is herein called a Control
Purchase and the cessation of individuals constituting a majority of the Board
as described in the foregoing clause (c) is herein called a Board Change.
ARTICLE V
GENERAL PROVISIONS
5.01. Termination of Plan. The Plan shall terminate
<PAGE> 20
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 January 31, 1997.
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.
5.06 Governing Law. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
<PAGE> 1
EXHIBIT 10.11
AMENDED AND RESTATED 1997 STOCK OPTION PLAN
FOR NON-EMPLOYEE PROVIDERS AFFILIATED WITH
PHYSICIAN PARTNERS, INC.
1. PURPOSE OF THE PLAN
The Amended and Restated 1997 Stock Option Plan for Non-Employee
Providers Affiliated with Physician Partners, Inc. (the "Plan") was established
by Physician Partners, Inc. (the "Company"), effective as of the effective time
(the "Effective Date") of the transaction contemplated under the Amended and
Restated Agreement and Plan of Reorganization and Merger, dated as of September
19, 1996, as amended on November 4, 1996, November 29, 1996 and December 31,
1996 (referred to herein, as so amended, as the "Reorganization and Merger
Agreement") 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.
<PAGE> 2
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.
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.
-2-
<PAGE> 3
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. Notwithstanding any contrary waiting
period or installment period in any Option Agreement or in the Plan,
each outstanding Option granted under the Plan shall become exercisable
in full for the aggregate number of shares covered thereby, in the event
(a) the Board of Directors (or, if approval of the Board of Directors is
not required as a matter of law, the stockholders of the Company) shall
approve (i) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to
which shares of Common Stock would be converted into cash, securities or
other property, other than any merger of the Company in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after such merger, (ii) any sale, lease, exchange, or other
transfer (in one transaction or a series of related transactions) of
all, or substantially all, of the assets of the Company or (iii) the
adoption of any plan or proposal for the liquidation or dissolution of
the Company, or (b) any person (as such term is defined in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended
from time to time (the "Exchange Act")), corporation or other entity
(other than the Company or any employee benefit plan sponsored by the
Company or any subsidiary of the Company) (i) shall purchase any Common
Stock of the Company (or securities convertible into the Company's
Common Stock) for cash, securities or any other consideration pursuant
to a tender offer or exchange offer, without the prior consent of
-3-
<PAGE> 4
the Board of Directors and (ii) shall become the "beneficial owner" (as
such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20 percent or more
of the combined voting power of the then outstanding securities of the
Company ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors
(calculated as provided in paragraph (d) of such Rule 13d-3 in the case
of rights to acquire the Company's securities), or (c) during any period
of two consecutive years, individuals who at the beginning of such
period constitute the entire Board of Directors shall cease for any
reason to constitute a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new
director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period.
Any transaction referred to in the foregoing clause (a) is herein called
an Approved Transaction, any purchase pursuant to a tender offer or
exchange offer or otherwise as described in the foregoing clause (b) is
herein called a Control Purchase and the cessation of individuals
constituting a majority of the Board as described in the foregoing
clause (c) is herein called a Board Change.
(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
-4-
<PAGE> 5
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;
-5-
<PAGE> 6
(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) 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.
-6-
<PAGE> 7
(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.
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
-7-
<PAGE> 8
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 as of the Effective Date; 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 January 31, 1997.
-8-
<PAGE> 1
EXHIBIT 10.13
PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
between
PHYSICIAN PARTNERS, INC.
and
FIRST UNION CAPITAL PARTNERS, INC.
Dated as of July 10, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SCHEDULES
1.1 - Stock Option Plans
3.6 - Financial Statements
5.2 - Conflicts
5.5 - Capitalization
5.7 - Non-GAAP Financial Statements
5.8 - Litigation
5.10(a) - Real Property
5.10(b) - Leases
5.11 - Material Contracts
5.13 - Labor Matters
5.14 - Employee Benefit Plans
5.15 - Applicable Law
5.16 - Taxes
5.17 - Intellectual Property
5.18 - Insurance
5.24 - Interested Transactions
EXHIBITS
A - Certificate of Incorporation
B - Certificate of Designation
C - Bylaws
D - Form of Warrant
E - Form of Registration Agreement
F - Amendments to Management Services Agreements
G - Form of Opinion of McDermott, Will & Emery
</TABLE>
<PAGE> 3
PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
THIS PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT (the "Agreement") is
dated as of July 10, 1997 between PHYSICIAN PARTNERS, INC., a Delaware
corporation (the "Company"), and FIRST UNION CAPITAL PARTNERS, INC., a Virginia
corporation (the "Purchaser").
Statement of Purpose
Pursuant to the Reorganization and Merger Agreement (as defined herein),
each of The Corvallis Clinic, P.C., an Oregon professional corporation ("Old
Corvallis"), HealthFirst Medical Group, P.C., an Oregon professional corporation
("Old HealthFirst"), and Medford Clinic, P.C., an Oregon professional
corporation ("Old Medford," together with Old Corvallis and Old HealthFirst, the
"Old PCs"), engaged in the following reorganization and merger transactions: (i)
each respective Old PC formed, as a wholly-owned subsidiary thereof, a
respective Oregon professional corporation (each such respective newly
incorporated professional corporation referred to as "New Corvallis," "New
HealthFirst" and "New Medford," and collectively with any other Person that
enters into a Management Services Agreement (herein defined) with the Company,
referred to herein as the "New PCs"); (ii) each Old PC transferred certain
assets relating to its provider professional services business to its respective
New PC and distributed to its respective shareholders all of the issued and
outstanding shares of its respective New PC; (iii) each Old PC converted from an
Oregon professional corporation to an Oregon business corporation; (iv) each Old
PC entered into a Management Services Agreement (as defined herein) with its
respective New PC; and (v) each of the Old PCs was merged with and into the
Company.
In order to obtain financing to capitalize the Company, refinance
certain of the Company's existing indebtedness, for the payment of fees and
expenses in connection with the transactions contemplated in the Transaction
Documents, to provide for ongoing working capital for capital spending and
acquisition needs and for other purposes in compliance with the regulations of
the United States Small Business Administration, the Company is entering into
this Agreement providing for the issuance by the Company of preferred stock and
warrants to purchase common stock for an aggregate purchase price of
$15,000,000.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. As used in this Agreement, and unless the context
requires a different meaning, the following terms have the meanings indicated:
<PAGE> 4
"Affiliate" means, with respect to a Person, any other Person (other
than a Subsidiary) which directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such Person and, if such Person is an individual, any member of the immediate
family (including parents, spouse and children) of such individual, any trust
whose principal beneficiary is such individual or one or more members of such
individual's immediate family and any Person who is controlled by any such
member or trust. The term "control" means (a) the power to vote five percent
(5%) or more of the securities or other equity interests of a Person having
ordinary voting power, or (b) the possession, directly or indirectly, of any
other power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise; provided, that in no event shall any New PC be deemed an Affiliate of
the Company by reason of the terms of any Management Services Agreement.
"Agreement" means this Preferred Stock and Warrant Purchase Agreement,
as amended or supplemented from time to time.
"Best knowledge" means, with respect to any Person, the actual knowledge
of an executive officer of such Person after reasonable inquiry.
"Bylaws" means the Bylaws of the Company as in effect on the date
hereof, a copy of which is attached hereto as Exhibit C.
"Business Day" means any day other than a Saturday, Sunday or other day
on which commercial banks in Charlotte, North Carolina are authorized or
required by law or executive order to close.
"Certificate of Incorporation" means the Amended and Restated
Certificate of Incorporation of the Company as in effect on the date hereof, a
copy of which is attached hereto as Exhibit A.
"Certificate of Designation" means the Certificate of Designation of the
Series B Preferred Stock attached hereto as Exhibit B setting forth the powers,
preferences and relative participating, optional or other rights and the
qualifications, limitations and restrictions of shares of the Series B Preferred
Stock.
"Change in Control Plan" means the Company's Change in Control Plan,
together with all agreements entered into thereunder, as in effect on the date
hereof.
"Charter Documents" means, with respect to any Person, the articles of
incorporation, bylaws and any amendments or supplements thereto, or other
equivalent organizational documents, of such Person, each as in effect upon the
date hereof.
"Class A Common Stock" means the Class A Common Stock of the Company,
par value $.01 per share, as described in the Certificate of Incorporation and
any other capital stock into which such Common Stock is reclassified or
reconstituted.
<PAGE> 5
"Class B Common Stock" means the Class B Common Stock of the Company,
par value $.01 per share, as described in the Certificate of Incorporation and
any other capital stock into which such Common Stock is reclassified or
reconstituted.
"Closing" has the meaning set forth in Section 2.5.
"Closing Date" has the meaning set forth in Section 2.5.
"Closing Date Value Per Share" has the meaning set forth in Section
9.10.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor statute thereto.
"Commission" means the Securities and Exchange Commission or any similar
agency then having jurisdiction to enforce the Securities Act.
"Common Stock" means the Class A Common Stock and the Class B Common
Stock.
"Company Charter Documents" means the Certificate of Incorporation, the
Bylaws, each as in effect on the date hereof, and the Certificate of
Designation.
"Company Competitor" means (a) any Person that directly provides
management services to medical group practices similar to those services then
provided by the Company and (b) any Person who owns, directly or indirectly, 50%
or more of the outstanding voting securities of any Person described in clause
(a); provided, that no Person shall be a Company Competitor for purposes of this
Agreement solely by reason of its beneficial ownership of securities for
investment purposes (including securities held by a venture firm or other
portfolio investor).
"Company Financial Statements" has the meaning set forth in Section 5.7.
"Confidential Information" has the meaning set forth in Section 12.1.
"Contractual Obligation" means, with respect to a Person, any provision
of any security issued by such Person or any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument to which such Person is a
party or by which it or any of its property is bound.
"Eligible Offering" has the meaning set forth in Section 8.1.
"Employee Benefit Plan" means, with respect to any Person, any employee
benefit plan within the meaning of Section 3(3) of ERISA which (a) is maintained
for employees of the Person or any ERISA Affiliate or (b) has at any time within
the preceding six years been maintained for the employees of the Person or any
current or former ERISA Affiliate.
"Employment Agreements" means (a) the Amended and Restated Employment
Agreement, dated as of September 19, 1996, between the Company and David M.
Goldberg; (b) the Amended and Restated Employment Agreement, dated as of
September 19, 1996, between the Company and
<PAGE> 6
Tim E. Dupell; (c) the Employment Agreement, dated as of September 19, 1996,
between the Company and Michael F. Bonazzola, M.D.; (d) the Employment
Agreement, dated as of September 19, 1996, between the Company and Gerald W.
Erstgaard, as amended as of December 31, 1996; (e) the Employment Agreement,
dated as of September 19, 1996, between the Company and Jon B. Ness; and (f) any
other agreement, contract, arrangement or understanding between the Company and
any of its directors, executives, managers or other employees relating to any
such individual's terms of employment or other engagement by the Company, each
as amended or supplemented from time to time.
"Environmental Laws" means any and all federal, state and local laws,
statutes, ordinances, rules, regulations, permits, licenses, approvals,
interpretations and orders of courts or Governmental Authorities relating to the
protection of human health or the environment, including, but not limited to,
requirements pertaining to the manufacture, processing, distribution, use,
treatment, storage, disposal, transportation, handling, reporting, licensing,
permitting, investigation or remediation of Hazardous Materials. Environmental
Laws include, without limitation, the Comprehensive Environmental Response,
Compensation, and Liability Act (42 U.S.C. Section 9601 et. seq.), the Hazardous
Material Transportation Act (49 U.S.C. Section 331 et. seq.), the Resource
Conservation and Recovery Act (42 U.S.C. Section 6901 et. seq.), the Federal
Water Pollution Control Act (33 U.S.C. Section 1251 et. seq.), the Clean Air Act
(42 U.S.C. Section 7401 et. seq.), the Toxic Substances Control Act (15 U.S.C.
Section 2601 et. seq.), the Safe Drinking Water Act (42 U.S.C. Section 300, et.
seq.), the Environmental Protection Agency's regulations relating to underground
storage tanks (40 C.F.R. Parts 280 and 281), and the rules and regulations
promulgated under each of these statutes, each as amended or supplemented.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any Person who together with the Company is
treated as a single employer within the meaning of Section 414(b), (c), (m) or
(o) of the Code or Section 4001(b) of ERISA.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"GAAP" means generally accepted United States accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board that are applicable
to the circumstances as of the date of determination.
"Governmental Authority" means the government of any nation, state,
city, locality or other political subdivision of any thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"Hazardous Materials" means any substances or materials (a) which are or
become defined as hazardous wastes, hazardous substances, pollutants,
contaminants or toxic substances under any Environmental Law, (b) which are
toxic, explosive, corrosive, flammable, infectious, radioactive,
<PAGE> 7
carcinogenic, mutagenic or otherwise harmful to human health or the environment
and are or become regulated by any Governmental Authority, (c) the presence of
which require investigation or remediation under any Environmental Law or common
law, (d) the discharge or emission or release of which requires a permit or
license under any Environmental Law or other Governmental Authority, (e) which
are deemed to pose a health or safety hazard to persons or neighboring
properties, (f) which are materials consisting of underground or aboveground
storage tanks, whether empty, filled or partially filled with any substance, or
(g) which contain, without limitation, asbestos, polychlorinated biphenyls, urea
formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived
substances or waste, crude oil, nuclear fuel, natural gas or synthetic gas.
"Indemnified Company Party" has the meaning set forth in Section
11.1(b).
"Indemnified Party" has the meaning set forth in Section 11.1(b).
"Indemnified Purchaser Party" has the meaning set forth in Section
11.1(a).
"Indemnitor" has the meaning set forth in Section 11.1(b).
"Intellectual Property" has the meaning set forth in Section 5.18.
"Leased Property" has the meaning set forth in Section 5.10.
"Leases" has the meaning set forth in Section 5.10.
"Liabilities" has the meaning set forth in Section 5.15.
"Lien" means any lien, mortgage, pledge, security interest, charge or
encumbrance of any kind.
"Management Services Agreements" means (a) the Practice Management
Agreement, dated as of January 31, 1997, between the Company and New Corvallis;
(b) the Practice Management Agreement, dated as of January 31, 1997, between the
Company and New HealthFirst; (c) the Practice Management Agreement, dated as of
January 31, 1997, between the Company and New Medford; and (d) any contract or
agreement entered into with any Person following the date hereof by the Company
or any Subsidiary relating to the provision of medical management services that
generates, or is proposed to generate on a pro forma basis, more than 15% of the
annual consolidated revenues of the Company and its Subsidiaries, each as
amended or supplemented from time to time.
"Material Adverse Effect" means, with respect to any Related Company, a
material adverse effect upon (a) the business, assets, condition (financial or
otherwise), operations or properties of such Related Company or (b) the ability
of such Related Company to perform its material obligations under any of the
Transaction Documents or other Material Contracts to which such Related Company
is a party.
"Material Contracts" has the meaning set forth in Section 5.11.
<PAGE> 8
"Merger Date Value Per Share" has the meaning set forth in Section 9.10.
"New Corvallis" means The Corvallis Clinic, P.C., an Oregon professional
corporation (formerly known as Physician Partners Corvallis, P.C.).
"New HealthFirst" means HealthFirst Medical Group, P.C., an Oregon
professional corporation (formerly known as Physician Partners HealthFirst,
P.C.).
"New Medford" means Medford Clinic, P.C., an Oregon professional
corporation (formerly known as Physician Partners Medford, P.C.).
"New PCs" has the meaning set forth in the Statement of Purpose.
"New PC Financial Statements" has the meaning set forth in Section 5.7.
"Old Corvallis" means The Corvallis Clinic, P.C., an Oregon professional
corporation, which pursuant to the Reorganization and Merger Agreement was
merged with and into the Company.
"Old HealthFirst" means HealthFirst Medical Group, P.C., an Oregon
professional corporation, which pursuant to the Reorganization and Merger
Agreement was merged with and into the Company.
"Old Medford" means Medford Clinic, P.C., an Oregon professional
corporation, which pursuant to the Reorganization and Merger Agreement was
merged with and into the Company.
"Old PCs" means collectively Old Corvallis, Old HealthFirst and Old
Medford.
"Permitted Transferee" has the meaning set forth in Section 13.3.
"Person" means any individual, firm, corporation, partnership, trust,
limited liability company, incorporated or unincorporated association, joint
venture, joint stock company, Governmental Authority or other entity of any
kind, and shall include any successor (by merger or otherwise) of such entity.
"Purchase Price" has the meaning set forth in Section 2.3.
"Purchased Securities" has the meaning set forth in Section 6.3.
"Preferred Shares" has the meaning set forth in Section 2.1.
"Public Offering" means a public offering of Common Stock pursuant to a
registration statement declared effective under the Securities Act, underwritten
on a firm commitment basis by an investment banking firm with a national
reputation acceptable to the Company.
<PAGE> 9
"Qualified Public Offering" means a Public Offering resulting in net
proceeds to the Company of at least $25,000,000.
"Real Property" has the meaning set forth in Section 5.10.
"Registration Agreement" means the Registration Rights Agreement dated
as of the date hereof among the Company and the Purchaser, a copy of which is
attached hereto as Exhibit E.
"Related Companies" means collectively (a) the Company (including any
predecessor or any Person merged, directly or indirectly, with or into the
Company), (b) each New PC, (c) each Subsidiary of the Company and (d) each
Subsidiary of a New PC.
"Reorganization and Merger Agreement" means the Amended and Restated
Agreement and Plan of Reorganization and Merger, dated as of September 19, 1996,
as amended on November 4, 1996, November 29, 1996 and December 31, 1996, among
the Company and each Old PC.
"Requirements of Law" means, with respect to a Person, any law, treaty,
rule or regulation or determination of an arbitrator or a court or other
Governmental Authority, in each case applicable to or binding upon such Person
or any of its property or to which such Person or any of its property is subject
or pertaining to any or all of the transactions contemplated or referred to
herein.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Series B Preferred Stock" means the Series B Cumulative Redeemable
Preferred Stock of the Company as described in the Certificate of Designation.
"Stock Option Plans" means (a) each of the stock option plans of the
Company listed on Schedule 1.1 as in effect on the date hereof and any and all
stock options issued pursuant thereto and (b) any other plan, agreement or award
providing for the issuance of options to acquire Common Stock adopted following
the date hereof by the Board of Directors of the Company.
"Subsidiary" means, as to any Person, any corporation, partnership or
other entity of which more than fifty percent (50%) of the outstanding capital
stock or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other managers of such corporation,
partnership or other entity is at the time, directly or indirectly, owned by or
the management of which is otherwise controlled by such Person; provided, that
in no event shall any Person be deemed a Subsidiary of the Company solely by
reason of the terms of any Management Services Agreement. Unless otherwise
qualified, all references to a "Subsidiary" or to "Subsidiaries" in this
Agreement shall refer to a Subsidiary or Subsidiaries of the Company.
"Taxes" has the meaning set forth in Section 5.16.
"Transaction Documents" means collectively, this Agreement, the Warrant,
the Registration Agreement and the Certificate of Designation.
<PAGE> 10
"Warrant" mean the common stock purchase warrant issued by the Company
to the Purchaser pursuant to this Agreement substantially in the form attached
hereto as Exhibit D.
1.2 Accounting Terms; Financial Statements. All accounting terms used
herein not expressly defined in this Agreement shall have the respective
meanings given to them in accordance with sound accounting practice. The term
"sound accounting practice" shall mean such accounting practice as, in the
opinion of the independent certified public accountants regularly retained by
the Company, conforms at the time to GAAP applied on a consistent basis except
for changes with which such accountants concur.
ARTICLE 2
PURCHASE AND SALE OF PREFERRED STOCK AND WARRANT
2.1 Purchase and Sale of Preferred Stock. Subject to the terms and
conditions hereof, the Company agrees to issue to the Purchaser, and the
Purchaser agrees that it will acquire from the Company, on the Closing Date,
15,000 shares of Series B Preferred Stock (the "Preferred Shares"). The
Preferred Shares shall have the powers, rights and preferences as set forth in
the Certificate of Designation.
2.2 Purchase and Sale of Warrant. Subject to the terms and conditions
hereof, the Company agrees to issue to the Purchaser and the Purchaser agrees
that it will acquire from the Company, on the Closing Date, a Warrant to
purchase 1,799,893 shares of Class B Common Stock, subject to reduction and
adjustment in such number of shares as provided in the Warrant.
2.3 Purchase Price. The aggregate purchase price of the Preferred Shares
and Warrant shall be $15,000,000 (the "Purchase Price").
2.4 Redemption Premium. The Company and the Purchaser acknowledge that
under the regulations of the United States Department of Treasury, the issuance
of the Series B Preferred Stock and the Warrant for an aggregate, combined
purchase price will result in the creation of a "redemption premium" on the
Series B Preferred Stock equal to the value of the Warrant. After taking into
account all relevant factors (including the fact that no public market for the
Common Stock currently exits, the general condition of the financial markets at
this time, the liquidation preferences of senior securities of the Company, the
exercise price for shares of Class B Common Stock issuable upon exercise of the
Warrant, the nature of the rights provided for in the Warrant and all other
matters concerning the transactions contemplated by this Agreement), the Company
and the Purchaser agree that the aggregate redemption premium on the Series B
Preferred Stock (i.e., the aggregate value of the Warrant) is $1,000,000. The
redemption premium will be allocated pro rata among the shares of Series B
Preferred Stock. Neither the Company nor the Purchaser will take any position
for United States federal income tax purposes that is inconsistent with the
provisions of this Section 2.4.
2.5 Closing. Subject to the terms and conditions of this Agreement, the
issuance and purchase of the Preferred Shares and Warrant shall take place at
the closing (the "Closing") to be
<PAGE> 11
held at the offices of Kennedy Covington Lobdell & Hickman, L.L.P., 100 North
Tryon Street, Suite 4200, Charlotte, North Carolina 28202 at 10:00 a.m.,local
time, on July 10, 1997, or at such other time and place as the Company and the
Purchaser may agree in writing (the "Closing Date"). At the Closing, the Company
shall deliver to the Purchaser the Preferred Shares and Warrant against delivery
to the Company by the Purchaser of the Purchase Price therefor by wire transfer
of immediately available funds, which funds shall not be used to repay any
indebtedness of any Related Company except in accordance with Section 9.10(a).
ARTICLE 3
CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO CLOSE
The obligation of the Purchaser to purchase the Preferred Shares and
Warrant, to pay the Purchase Price therefor at the Closing and to perform any
obligations hereunder shall be subject to the satisfaction of the following
conditions on or before the Closing Date:
3.1 Representations and Warranties. The representations and warranties
of the Company contained in Section 5 hereof shall be true and correct in all
material respects on and as of the Closing Date as if made on and as of such
date.
3.2 Compliance with this Agreement. The Company shall have performed and
complied in all material respects with all of the agreements and conditions set
forth or contemplated herein that are required to be performed or complied with
by the Company on or before the Closing Date.
3.3 Officers' Certificate. The Purchaser shall have received a
certificate dated as of the Closing Date from the chief executive officer and
chief financial officer of the Company in form and substance reasonably
satisfactory to the Purchaser, to the effect that (a) all representations and
warranties of the Company contained in this Agreement are true, correct and
complete in all material respects, (b) the Company is not in violation in any
material respect of any of the covenants contained in this Agreement and (c) all
conditions precedent to the Closing of this Agreement to be performed by the
Company have been duly performed in all material respects.
3.4 Secretary's Certificates.
(a) The Purchaser shall have received a certificate from the Company
dated the Closing Date and signed by the Secretary or an Assistant Secretary of
the Company certifying (i) that the attached copies of the Company Charter
Documents and resolutions of the board of directors of the Company approving
this Agreement and the transactions contemplated hereby, are all true, complete
and correct and remain unamended and in full force and effect, (ii) as to the
incumbency and specimen signature of each officer of the Company executing this
Agreement and any other document delivered in connection herewith on behalf of
the Company and (iii) as to the good standing of the Company and its
Subsidiaries in the applicable states of their incorporation and in each other
state in which the Company or any Subsidiary is transacting business (except for
states in which the failure to qualify or remain in good standing could not
reasonably be expected to have a Material Adverse Effect).
<PAGE> 12
(b) The Purchaser shall have received a certificate from each New PC
dated the Closing Date and signed by the Secretary or an Assistant Secretary of
such New PC certifying (i) that the attached copies of its Charter Documents are
all true, complete and correct and remain unamended and in full force and effect
and (ii) as to the good standing of such New PC and its Subsidiaries in the
applicable states of their incorporation and in each other state in which such
New PC or any of its Subsidiaries are transacting business (except for states in
which the failure to qualify or remain in good standing could not reasonably be
expected to have a Material Adverse Effect).
3.5 Transaction and Other Requested Documents. The Purchaser shall have
received true, complete and correct copies of (a) the Company Charter Documents,
the Transaction Documents, the Employment Agreements, the Management Services
Agreements, the Change in Control Plan and the Stock Option Plans and (b) such
other documents, opinions, certificates and agreements as the Purchaser may
reasonably request in connection with or relating to the sale of the Preferred
Shares and Warrant and the transactions contemplated hereby, all in form and
substance reasonably satisfactory to the Purchaser.
3.6 Financial Matters.
(a) Financial Statements. The Purchaser shall have received such
financial statements, certificates and other information concerning each Related
Company, as set forth on Schedule 3.6 hereto.
(b) Payment at Closing. There shall have been paid by the Company
to the Purchaser any accrued and unpaid fees due hereunder (including, without
limitation, reasonable legal fees and expenses and all reasonable fees and
expenses of Ernst & Young, L.L.P.), including all taxes, fees and other charges
in connection with the execution, delivery, recording, filing and registration
of any of the Transaction Documents.
3.7 Purchase Permitted by Applicable Laws. The acquisition of and
payment for the Preferred Shares and Warrant to be acquired by the Purchaser
hereunder and the consummation of the transactions contemplated hereby (a) shall
not be prohibited by any Requirements of Law and (b) shall not subject the
Purchaser to any penalty or, in its reasonable judgment, other onerous condition
under or pursuant to any Requirement of Law; and the Purchaser shall have
received such certificates or other evidence as they may reasonably request to
establish compliance with this condition.
3.8 Consents and Approvals. All consents, exemptions, authorizations or
other actions by, or notices to, or filings with, Governmental Authorities and
other Persons in respect of all Requirements of Law and with respect to
Contractual Obligations of the Company reasonably necessary, desirable, or
required in connection with the execution, delivery or performance by the
Company or enforcement against the Company of this Agreement and the other
Transaction Documents shall have been obtained and be in full force and effect,
and the Purchaser shall have been furnished with appropriate evidence thereof,
and all waiting periods shall have lapsed without extension or the imposition of
any conditions or restrictions.
<PAGE> 13
3.9 Registration Agreement. The Company shall have duly executed and
delivered the Registration Agreement.
3.10 Certificate of Designation. The Certificate of Designation shall
have been filed and shall have become effective in the manner prescribed by
applicable law.
3.11 Amendments to Management Services Agreements. The Purchaser shall
have received certified copies of amendments to each Management Services
Agreement in the form attached hereto as Exhibit F which shall be in full force
and effect.
3.12 Estoppel Certificate. The Purchaser shall have received from each
New PC an estoppel certificate with respect to the applicable Management
Services Agreement in form and substance reasonably satisfactory to the
Purchaser.
3.13 Extension of Revolving Credit Facility. The Company shall have
extended for a period of not less than 90 days that certain $5.5 million
revolving credit facility evidenced by the Credit Agreement, dated as of
February 1, 1997, between the Company and United States Bank of Oregon and the
Purchaser shall have been furnished with appropriate evidence thereof reasonably
satisfactory to the Purchaser.
3.14 SBA Documents and Information. The Company shall have executed and
delivered to the Purchaser the forms and information required by the rules and
regulations of the United States Small Business Administration, including,
without limitation, a Size Status Declaration on SBA Form 480 and an Assurance
of Compliance on SBA Form 652 and information necessary for the preparation of a
Portfolio Financing Report on SBA Form 1031.
3.15 Disbursement Instructions. The Purchaser shall have received
written instructions from the Company to the Purchaser directing the payment of
any proceeds of the Preferred Shares and Warrant that are to be paid on the
Closing Date.
3.16 No Material Adverse Change. On and prior to the Closing Date, no
event shall have occurred which has had or could reasonably be expected to have
a Material Adverse Effect.
3.17 Opinion of Counsel. The Purchaser shall have received an opinion of
McDermott, Will & Emery, counsel to the Company, dated the Closing Date,
substantially in the form of Exhibit G.
ARTICLE 4
CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE
The obligations of the Company to issue and sell the Preferred Shares
and the Warrant and to perform its other obligations hereunder shall be subject
to the satisfaction of the following conditions on or before the Closing Date:
<PAGE> 14
4.1 Representations and Warranties True. The representations and
warranties of the Purchaser contained in Section 6 hereof shall be true and
correct in all material respects on and as of the Closing Date as if made on and
as of such date.
4.2 Compliance with this Agreement. The Purchaser shall have performed
and complied in all material respects with all of its agreements and conditions
set forth or contemplated herein that are required to be performed or complied
with by such Purchaser on or before the Closing Date.
4.3 Issuance Permitted by Requirements of Laws. The issuance of the
Preferred Shares and the Warrant to be issued by the Company hereunder and the
consummation of the transactions contemplated hereby (a) shall not be prohibited
by any Requirement of Law and (b) shall not subject the Company to any penalty
or, in its reasonable judgment, other onerous condition under or pursuant to any
Requirement of Law.
4.4 Officer's Certificate. The Company shall have received a certificate
dated as of the Closing Date from an executive officer of the Purchaser in form
and substance reasonably satisfactory to the Company to the effect that (a) all
representations and warranties of the Purchaser contained in this Agreement are
true, correct and complete in all material respects, (b) the Purchaser is not in
violation in any material respect of any of the covenants contained in this
Agreement and (c) all conditions precedent to the Closing of this Agreement to
be performed by the Purchaser have been duly performed in all material respects.
4.5 Consents and Approvals. All consents, exemptions, authorizations or
other actions by, or notices to, or filings with, Governmental Authorities and
other Persons in respect of all Requirements of Law and with respect to
Contractual Obligations of the Purchaser reasonably necessary, desirable, or
required in connection with the execution, delivery or performance by the
Purchaser or enforcement against the Purchaser of this Agreement and the other
Transaction Documents shall have been obtained and be in full force and effect,
and the Company shall have been furnished with appropriate evidence thereof, and
all waiting periods shall have lapsed without extension or the imposition of any
conditions or restrictions.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser, before and
after giving effect to the transactions contemplated by this Agreement as
follows:
5.1 Corporate Existence and Power. Each Related Company (a) is a
corporation duly organized, validly existing and in good standing under the laws
of its respective jurisdiction of incorporation, (b) has all requisite corporate
power and authority to own and operate its property, to lease the property it
operates as lessee and to conduct the business in which it is currently, or is
currently proposed to be, engaged. The Company has the corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and each of the other Transaction Documents.
<PAGE> 15
5.2 Corporate Authorization; No Contravention. The execution, delivery
and performance by the Company of each Transaction Document to which it is or
will be a party and the transactions contemplated thereby, including without
limitation the issuance by the Company of the Preferred Shares and the Warrant
and the reservation of Class B Common Stock to be issued pursuant to the Warrant
thereunder, (a) have been duly authorized by all necessary corporate, and if
required, stockholder action, (b) do not contravene the terms of the Company
Charter Documents or the Charter Documents of any other Related Company and (c)
except as disclosed in Schedule 5.2, will not, in any material respect, violate,
conflict with or result in any breach or contravention of or the creation of any
Lien under, any material Contractual Obligation of any Related Company, or any
Requirement of Law applicable thereto.
5.3 Governmental Authorization; Third Party Consents. No approval,
consent, compliance, exemption, authorization or other action by, or notice to,
or filing with, any Governmental Authority or any other Person in respect of any
Requirement of Law, and no lapse of a waiting period under a Requirement of Law,
is necessary or required in connection with the execution, delivery or
performance by the Company or enforcement against the Company of the Transaction
Documents or the transactions contemplated thereby.
5.4 Binding Effect. The Transaction Documents to which the Company is a
party constitute the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with their respective terms except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity relating to
enforceability.
5.5 Capitalization. As of the Closing Date, the authorized capital stock
of the Company and its Subsidiaries and the issued and outstanding shares
thereof are as described on Schedule 5.5. As of the Closing Date, all
outstanding shares of capital stock of the Company and its Subsidiaries will be
duly authorized and validly issued, fully paid, nonassessable and free and clear
of any Lien created by the Company or any Subsidiary thereof. Except as
described in Schedule 5.5, (a) no other class of capital stock or other
ownership interests of the Company or its Subsidiaries are authorized or
outstanding, (b) neither the Company nor any Subsidiary has outstanding rights
(either preemptive or other) or options to subscribe for or purchase from the
Company or such Subsidiary, or any warrants or other agreements providing for or
requiring the issuance by the Company or such Subsidiary of, any of its
respective capital stock or any securities convertible into or exchangeable for
its respective capital stock and (c) and neither the Company nor any Subsidiary
has reserved for issuance any shares of its respective capital stock.
5.6 Subsidiaries. (a) The Company 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 and is not a member of a nonprofit corporation or limited
liability company.
(b) The New PCs do not own, directly or indirectly, any
outstanding capital stock of or other ownership interest in (or securities,
rights or other interests convertible into capital
<PAGE> 16
stock or other ownership interests) any Person and are not members of a
nonprofit corporation or limited liability company.
5.7 Financial Statements. (a) The Company has previously delivered to
the Purchaser true and complete copies of (i) the audited balance sheets of (A)
the Company as at September 30, 1996, (B) Old Corvallis as at November 30, 1994,
November 30, 1995 and September 30, 1996; (C) Old HealthFirst as at December 31,
1994, December 31, 1995 and September 30, 1996; (D) the Suburban Medical Clinic,
Inc. (a predecessor of Old HealthFirst) as at December 31, 1994 and 1995; and
(E) Old Medford as at December 31, 1994, December 31, 1995 and September 30,
1996 and the related audited statements of income, stockholders equity and cash
flows of the Company and each Old PC (or predecessors thereto) for the fiscal
period ended on each such date; (ii) the unaudited pro forma balance sheet of
the Company as at September 30, 1996 and the related unaudited pro forma
statements of income, stockholders equity and cash flows of the Company for the
fiscal period ended on each such date; (iii) the audited balance sheet of the
Company as of December 31, 1996 and the related audited statements of income,
stockholders' equity and cash flows of the Company for the year ended December
31, 1996; and (iv) the unaudited balance sheet of the Company as at May 31, 1997
and the related unaudited statements of income, stockholders equity and cash
flows of the Company for the five month period ended on such date, in each case
above in clauses (i), (ii), (iii) and (iv) together with related notes thereto
and, if audited, accountant's reports thereon, a complete list of which is set
forth in Schedule 3.6 (referred to herein, collectively, as the "Company
Financial Statements"). Each of the Company Financial Statements presents
fairly, in all material respects, the financial position of the Company (or any
predecessor) as of the date and the results of operations and cash flow of the
Company (or any predecessor) for the period indicated, and except for the
Company Financial Statements set forth on Schedule 5.7, all Company Financial
Statements have been prepared in accordance GAAP. Since December 31, 1996 there
has been no change, event or development of any kind which has had or could
reasonably be expected to have a Material Adverse Effect.
(b) The Company has previously delivered to the Purchaser true and
complete copies of the (i) audited balance sheets of each New PC as at September
30, 1996 and December 31, 1996 and (ii) the unaudited balance sheets of each New
PC as at May 31, 1997 and the related unaudited statements of income of each
such New PC for the fiscal period ended on each such date, in each case together
with related notes thereto and, if audited, accountant's reports thereon, a
complete list of which is set forth in Schedule 3.6 (referred to herein,
collectively, as the "New PC Financial Statements"). Each of the New PC
Financial Statements presents fairly, in all material respects, the financial
position of each New PC as of the date and the results of operations and cash
flow of such New PC for the period indicated. All of the New PC Financial
Statements have been prepared in accordance with GAAP. Since December 31, 1996,
there has been no change, event or development with respect to any New PC of any
kind which has had or could reasonably be expected to have a Material Adverse
Effect (determined with respect to any New PC on a pro forma basis compared to
its corresponding Old PC).
5.8 Litigation. (a) Except as set forth on the Schedule 5.8, there are
no claims, disputes, actions, proceedings or investigations pending or, to the
best of the Company's knowledge, threatened against any Related Company or any
of the assets or properties of any Related Company before any court, arbitrator
or Governmental Authority (i) with respect to any Transaction
<PAGE> 17
Document or any transaction contemplated thereby or (ii) which could reasonably
be expected, if adversely determined, to have a Material Adverse Effect.
(b) Except as set forth on the Schedule 5.8, there are no orders, writs,
judgments, injunctions, decrees, determinations or awards to which any Related
Company is subject (i) with respect to any Transaction Document or any
transaction contemplated thereby or (ii) which could reasonably be expected to
have a Material Adverse Effect.
5.9 Licenses and Permits. Each Related 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 could not reasonably be expected to have a
Material Adverse Effect.
5.10 Properties. (a) Set forth in Schedule 5.10(a) is a complete list of
(i) all real property owned by any Related Company (the "Real Property") and
(ii) the corresponding owner of such Real Property. All such Real Property is
owned by the owner designated in such Schedule 5.10(a) free and clear of all
Liens, except (A) as set forth on such Schedule 5.10(a), (B) liens for Taxes not
yet payable and (C) liens for Taxes and other claims the validity of which any
Related Company is contesting in good faith and the existence of which, in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
(b) Set forth in Schedule 5.10(b) is a complete list of (i) all
leases and subleases of real or personal property to which each Related Company
is a party (the "Leases"), (ii) the corresponding lessee under such Lease and
(iii) a description of the property subject to such Lease (the "Leased
Property"). All such Leases are valid and no Related Company is, and to the best
of the Company's knowledge no other party to any Lease is, in violation of, or
in default under, any such Lease in any material respect, 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 in any material respect
on the part of any Related Company or, to the best of the Company's knowledge,
on the part of any other party thereto.
(c) The Real Property, the Leased Property and all other assets
owned, operated and leased by each Related Company are (i) maintained in a state
of repair and operating condition consistent with good business practices, (ii)
to the best of the Company's knowledge, in material compliance with all
applicable laws, regulations and ordinances, including, without limitation,
building and zoning laws and (iii) suitable for the uses intended therefor.
5.11 Material Contracts. (a) Set forth in Schedule 5.11 is a complete
list of all material contracts, agreements and commitments to which each Related
Company is a party or by which any Related Company is bound (referred to herein,
collectively, as the "Material Contracts"), including, without limitation (i)
all material contracts, partnership agreements, joint venture agreements and all
other agreements between any Related Company, 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) the Leases, (iii) the Intellectual Property (as such term is
defined in Section 5.17(a) hereof), (iv) all material indentures, mortgages,
notes, loan or credit
<PAGE> 18
agreements and other agreements and obligations relating to the indebtedness,
borrowing of money or to the direct or indirect guarantee or assumption of
obligations of third parties requiring any Related Company to make, or setting
forth conditions under which such Related Company 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 in any amount for directors and officers or providing for benefits in
excess of $100,000 to any employee or group of employees (whether by plan,
series of agreements or otherwise) of any Related Company, (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 any Related Company (or
any provider employee of any Related Company) to compete in any line of business
with any Person or in any geographic area, (ix) all written contracts and
commitments to which any Related Company is a party that require, in accordance
with their respective terms, aggregate future payments by any Related Company 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, (x) all Employment
Agreements, (xi) all Management Services Agreements, (xii) all agreements
entered into under the Stock Option Plans and (xiii) all agreements entered into
under the Change in Control Plan.
(b) Each Material Contract is in full force and effect and constitutes
the legal, valid and binding obligation of any Related Company which is a party
thereto and is enforceable against such Related Company in accordance with its
respective terms except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity relating to enforceability. Each Related Company is not,
nor, to the best of the Company's knowledge, is any other party to any such
Material Contract, in violation of, or default under, any material provision of
any such Material Contract in any material respect, and the consummation of the
transactions contemplated by the Transaction Documents will not constitute in
any material respect, a violation or default thereunder on the part of any
Related Company or, to the best of the Company's knowledge, on the part of any
other party thereto.
5.12 Reorganization and Merger. The Company has delivered to the
Purchaser true, complete and correct copies of the Reorganization and Merger
Agreement together with all amendments and modifications thereto. Such documents
(including the schedules and exhibits thereto) comprise a full and complete copy
of all agreements between the parties thereto with respect to the subject matter
thereof and all transactions related thereto, and there are no agreements or
understandings, oral or written, or side agreements not contained therein that
modify the substance thereof.
5.13 Labor Matters. Except as set forth on Schedule 5.13, no Related
Company is a party to any agreement that provides in the event of termination of
the employment of any of the current officers, directors, employees or agents of
any Related Company, that a Related Company will 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 with respect to any Related Company; each
Related Company is and has been in compliance in all material respects
<PAGE> 19
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 the Company, 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 any Related Company or otherwise asserted an intention to conduct
any such investigation. No Related Company is 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 any Related Company.
5.14 Employee Benefit Plans. (a) The Company has delivered or made
available to the Purchaser full and complete copies of all of the Employee
Benefit Plans of each Related Company since January 1, 1995. No Related Company
has established, operated or maintained any Employee Benefit Plan except as
disclosed on Schedule 5.14 since January 1, 1995
(b) No Employee Benefit Plan of any Related Company is a
multi-employer plan (as such term is defined in Section 3(37) of ERISA. To the
best of the Company's knowledge, since December 31, 1992, all of the Employee
Benefit Plans of each Related Company have been maintained, operated and
administered in compliance in all material respects with all Requirements of Law
currently in effect with respect thereto, and each Related Company has performed
all material obligations required to be performed thereby, and is not in any
material respect in default or in violation of, any of its Employee Benefit
Plan. Each Employee Benefit Plan of each Related 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, to the best
knowledge of the Company, 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 Employee Benefit Plan of each Related Company. To the best of the
Company's knowledge, there have been no prohibited transactions with respect to
any Employee Benefit Plan of any Related Company that would result in any
material liability or excise tax under ERISA or the Code. No Related Company has
incurred, and does not reasonably expect to incur (i) any material liability to
the Pension Benefit Guaranty Corporation, (ii) any material 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 Closing Date. Since December 31, 1992, there has
been no change in the financial condition of any of the Employee Benefit Plans
of any Related 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. All benefits, expenses and other amounts due and
payable under any Employee Benefit Plan of any Related Company as of the date
hereof and all contributions, transfers and payments required to be made to any
Employee Benefit Plan of any Related Company as of the date hereof have been
paid or made, or accrued and booked. There are no "leased employees" (within the
meaning of Section 414(n) of
<PAGE> 20
the Code) who perform services for any Related Company. There are no actions,
suits or claims pending or, to the best of the Company's knowledge, threatened
with respect to any Employee Benefit Plan of any Related Company other than
routine claims for benefits. To the best of the 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 or a
material adverse effect on any Employee Benefit Plan of any Related Company.
5.15 Compliance with Applicable Law. Except as set forth on Schedule
5.15, to the best of the Company's knowledge, each Related Company is not, nor
since December 31, 1992 has any Related Company been, engaged in any activity,
nor has any Related Company omitted to take any action, as a result of which
such Related Company is or has been in violation of any Requirement of Law
applicable to such Related Company including, without limitation:
(a) Health Care Laws and Regulations. (i) Each Related Company
has timely filed all reports required to be filed in connection with federal
Medicare and applicable state Medicaid programs and due on or before the date
hereof, and all required reports are true and complete in all material respects;
there are no claims, actions or appeals pending (and no Related Company has
filed anything that would result in any claims, actions or appeals) before any
commission, board or agency with respect to any state or federal Medicare or
Medicaid cost reports or claims filed by such Related Company on or before the
date hereof, or with respect to any disallowances by any intermediary, carrier,
other insurer, commission, board or agency in connection with any audit of any
cost reports that, if adversely determined, would have a Material Adverse
Effect; no validation review or program integrity review related to any Related
Company has been conducted with respect to the Related Company by any
commission, board or agency in connection with federal Medicare or state
Medicaid programs, and no such reviews are scheduled, pending or, to the
Company's knowledge, threatened against or affecting any Related Company; each
Related Company has timely filed all material reports, data and other
information required by any other regulatory agency with authority to regulate
the Related Company or its business in any manner; each Related Company is in
compliance in all material respects with all rules, regulations and requirements
of all health regulatory agencies, except where such noncompliance would not
have a Material Adverse Effect; and the conduct of the business of each Related
Company does not violate 42 U.S.C. Section 1320a-7b (commonly known as the
"Anti-Kickback Statute") or 42 U.S.C. Section 1395nn (commonly known as the
"Stark Amendments"), including all amendments thereto to the extent effective on
the date hereof, unless any noncompliance with any of the foregoing provisions
in this clause (i) would not have a Material Adverse Effect.
(ii) Without limiting anything contained in Section 5.15(a)(i)
hereof, none of the Related Companies, its executive officers and directors, or
Persons who provide professional services on behalf of any such Related Company
have:
(A) knowingly and willfully made or caused to be made a
false statement or representation of a material fact in any application for any
benefit or payment;
(B) knowingly and willfully made or caused to be made any
false statement or representation of a material fact for use in determining
rights to any benefit or payment;
<PAGE> 21
(C) presented or caused to be presented a claim for
reimbursement under CHAMPUS, Medicare, Medicaid or other state health care
program that is (1) for an item or service that the Person presenting or causing
to be presented knows or should know was not provided as claimed, or (2) for an
item or service and the Person presenting knows or should know that the claim is
false or fraudulent;
(D) failed to disclose knowledge of the occurrence of any
event affecting the initial or continuing right of a claimant to any benefit or
payment on its own behalf or on behalf of another, with intent to fraudulently
secure such benefit or payment; or
(E) knowingly and willfully made or caused to be made or
induced or sought to induce the making of any false statement or representation
(or omitted to state a fact required to be stated therein or necessary to make
the statements contained therein not misleading) of a material fact with respect
to (1) the conditions or operations of a facility in order that the facility may
qualify for CHAMPUS, Medicare, Medicaid or other state health care program
certification, or (2) information required to be provided under Section 1124A of
the Social Security Act (42 U.S.C. Section 1320a-3).
(iii) Without limiting anything contained in Section 5.15(a)(i)
hereof: (A) no Person (other than the Purchaser) will have a direct or indirect
ownership interest (as those terms are defined in 42 C.F.R. Section 1001.1001)
in the Company of 5% or more immediately prior to or following the transactions
contemplated by this Agreement.
(iv) Without limiting anything contained in Section 5.15(a)(i)
hereof, to the best knowledge of the Company, there are no Medicare, Medicaid or
CHAMPUS recoupments or recoupments of any other third-party payor being sought,
threatened, requested or claimed against any Related Company which could
reasonably be expected to have a Material Adverse Effect.
(b) Environmental Matters. (i) Each Related Company is in compliance
with all applicable Environmental Laws 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.
(ii) No Related Company has (A) generated, treated, stored,
disposed of, transported or handled any Hazardous Material or (B) released into
the environment any Hazardous Material, in any case in violation of any
applicable Environmental Law or under circumstances which have subjected, or may
subject, such Related Company to any indemnity or remedial obligation under any
Environmental Law or any contract or agreement with another party which could
reasonably be expected to have a Material Adverse Effect.
(iii) There is and has been no (A) soil, surface water or ground
water contamination affecting any Real Property or Leased Property, (B)
asbestos-containing material installed in any such Real Property or Leased
Property, (C) polychlorinated biphenyls deposited at any such Real Property or
Leased Property or (D) illness, disability, injury or death of any Person
(including, without limitation, any employee or former employee of any Related
Company or any
<PAGE> 22
Person employed at any such Real Property or Leased Property subject to any
Lease) in any way arising out of exposure to substances or conditions present at
any such Real Property or Leased Property which, in the case of any of (A)
through (D), would have a Material Adverse Effect.
5.16 Taxes. All material 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, each Related Company have been duly and timely
filed within the time periods required by law by each Related Company. Copies of
all such returns or reports have been made available to the Purchaser. Except as
set forth on the Schedule 5.16, all such returns or reports (a) are, or will be
at the time of filing thereof in accordance with the tax laws applicable thereto
in all material respects and (b) accurately reflect, or will accurately reflect
at the time of filing thereof, all such Taxes required to be paid by each
Related Company for the periods covered thereby in all material respects. 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
made. There are no tax liens on any of the assets of any Related Company and, to
the best of the Company's knowledge, no basis exists for the imposition of any
such liens. Each Related Company has no dispute with any taxing authority as to
Taxes of any nature. Except as set forth on Schedule 5.16, there is no
unassessed tax deficiency proposed or, to the best of the Company's knowledge,
threatened against any Related Company, and no action, proceeding or audit with
respect to any return or report of any Related Company by any Governmental
Authority is pending or, to the best of the Company's knowledge, threatened by
any Governmental Authority for assessment, reassessment or collection of any
Taxes against any Related Company or its operations.
5.17 Intellectual Property. Set forth in Schedule 5.17 is (i) 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 each Related
Company that are material to the business of any Related Company (referred to
herein, collectively, as "Intellectual Property") and (ii) the respective
Related Company which owns such Intellectual Property. Each Related Company has
free and unencumbered rights to use all of its respective Intellectual Property,
except for rights the failure of which to possess would not have a Material
Adverse Effect. No Related Company has received notice of any claim challenging
the free and unencumbered right of such Related Company to use its respective
Intellectual Property.
5.18 Insurance. Each Related Company has fire and casualty insurance
policies with extended coverage (subject to deductibles) sufficient to allow it
to replace any of its properties or assets that might be damaged or destroyed.
Each Related Company has business interruption insurance policies with coverage
sufficient to allow the recovery of the full amount of any losses occasioned by
any business interruption. Each Related Company has medical malpractice
insurance sufficient to allow the recovery, by such Related Company and the
Company, of the full amount of any losses or liabilities incurred in connection
with the provision of medical services by such Related Company or any employee
or former employee thereof. The Company has director and
<PAGE> 23
officers' liability insurance with sufficient coverage to fully indemnify its
directors and officers for any claims arising from their acts or omissions in
such capacities. Set forth in Schedule 5.18 is a full and complete list of all
insurance policies naming any Related Company as an insured or beneficiary or as
a loss payee or with respect to which the Company or any Subsidiary has paid all
or part of the premium in force as of the date hereof. To the best knowledge of
the Company, all of such policies are in full force and effect, and no such
policy (or any predecessor policy of an Old PC) has been interrupted during the
past two years.
5.19 Corporate Records. Each Related Company has caused to be delivered
to the Purchaser true, accurate and complete copies of (a) its Charter
Documents, as currently in effect, and (b) records of all of its proceedings of
incorporators, stockholders, directors and committees of directors during the
past five years. The books and records of each Related Company have been
maintained in accordance with good business practices.
5.20 Small Business Matters. The Company, together with its "affiliates"
(as that term is defined in Title 13, Code of Federal Regulations,
Section 121.103), is a "small business concern" within the meaning of the Small
Business Investment Act of 1958 and the regulations thereunder, including Title
13, Code of Federal Regulations, Section 121.201. The information regarding the
Company and its affiliates set forth in SBA Form 480, Form 652 and Form 1031
delivered at the Closing is accurate and complete. Copies of such forms shall
have been completed and executed by the Company and delivered to the Purchaser
at the Closing. Neither the Company nor any Subsidiary presently engages in, nor
shall they hereafter engage in, any activities, nor shall the Company or any
Subsidiary use directly or indirectly the proceeds from the sale of the
Preferred Shares and Warrant hereunder for any purpose, for which a "small
business investment company" is prohibited from providing funds by the Small
Business Investment Act of 1958 and the regulations thereunder (including Title
13, Code of Federal Regulations, Section 107.720).
5.21 Private Offering. No form of general solicitation or general
advertising was used by the Company or its representatives in connection with
the offer or sale of the Preferred Shares or Warrant or other securities.
Assuming the accuracy of the representations and warranties of the Purchaser in
Article 6 hereof, no registration of the Preferred Shares or Warrant pursuant to
the provisions of the Securities Act or any state securities or "blue sky" laws
will be required by the offer, sale or issuance of the Preferred Shares, Warrant
or the Class B Common Stock pursuant to this Agreement.
5.22 Broker's, Finder's or Similar Fees. There are no brokerage
commissions, finder's fees or similar fees or commissions payable in connection
with the transactions contemplated hereby or any other Transaction Document to
which the Company or any Subsidiary is a party, based on any agreement,
arrangement or understanding with the Company or any such Subsidiary or any
action taken by the Company or any such Subsidiary.
5.23 Use of Proceeds. The proceeds from the sale of the Preferred Shares
and the Warrant will be used as set forth in Section 9.9 hereof. No portion of
such proceeds will be used (a) to provide capital to a corporation licensed
under the Small Business Investment Act of 1958, as amended, (b) outside the
United States or (c) for any purpose contrary to the public interest
<PAGE> 24
(including but not limited to activities which are in violation of law) or
inconsistent with free competitive enterprises, in each case, within the meaning
of 13 C.F.R. Section 107.720.
5.24 Interested Transactions. Except as set forth in Schedule 5.24, no
Related Company is a party to any contract, agreement, transaction,
understanding or concession with any of the following Persons, or in which any
of the following Persons have any direct or indirect interest (other than as a
shareholder or employee of such Related Company): (a) any shareholder, director
or executive officer of a Related Company; (b) any of the spouse, parents,
siblings and children of any of the Persons described in clause (a); or (c) any
corporation, trust, partnership or other entity in which any of the Persons
described in clauses (a) and (b) have a beneficial interest (other than a
corporation whose shares are publicly traded and in which such Persons own
beneficially in the aggregate no more than 5% of the equity interests).
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Company, before and
after giving effect to the transactions contemplated by this Agreement, as
follows:
6.1 Authorization; No Contravention. The execution, delivery and
performance by the Purchaser of this Agreement and the Registration Agreement,
and the transactions contemplated thereby, (a) are within the Purchaser's power
and authority and have been duly authorized by all necessary action, (b) do not
contravene the terms of the Purchaser's Charter Documents and (c) will not, in
any material respect, violate, conflict with or result in any breach or
contravention of or the creation of any Lien under, any material Contractual
Obligation of the Purchaser, or any Requirement of Law applicable thereto
directly relating to the Purchaser.
6.2 Binding Effect. This Agreement and the Registration Agreement have
been duly executed and delivered by the Purchaser, and this Agreement and the
Registration Agreement constitute the legal, valid and binding obligations of
the Purchaser enforceable against it in accordance with their respective terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws
affecting the enforcement of creditors' rights generally or by general equitable
principles relating to enforceability.
6.3 Purchase for Own Account. The Preferred Shares, the Warrant and the
shares of Class B Common Stock to be issued upon exercise thereof (the
"Purchased Securities") are being or will be acquired for its own account and
with no intention of distributing or reselling such securities or any part
thereof in any transaction that would be in violation of the Securities Act or
the securities laws of any state. The Purchaser understands that the Purchased
Securities have not been registered under the Securities Act and may not be
sold, transferred or otherwise disposed of unless the Purchased Securities are
first registered under the Securities Act or registration is available. The
Purchaser agrees not to make any disposition of any Purchased Securities unless
and until there is an effective registration under the Securities Act and
applicable state securities laws with respect to such Purchased Securities or
the Purchaser shall have provided the Company a written opinion of
<PAGE> 25
counsel in form and substance reasonably satisfactory to the Company that an
exemption from such registration is available under the Securities Act and such
state securities law. The Purchaser agrees to the imprinting, so long as
required by law, of a legend on certificates representing its Preferred Shares,
the Warrant or its shares of Class B Common Stock to the following effect:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, OR THE SECURITIES LAWS OF ANY STATE
AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS."
The Purchaser acknowledges that any transfer or other disposition of Purchased
Securities in contravention of this Section 6.3 shall be null and void and the
Company shall not be required (i) to transfer on its books any such Purchased
Securities or (ii) to treat as the owner of such Purchased Securities or
otherwise to accord voting or dividend rights to any purported transferee with
respect thereto.
6.4 Accredited Investor. The Purchaser is an "accredited investor" (as
such term is defined in Rule 501(a) of Regulation D promulgated under the
Securities Act). The Purchaser has received sufficient information about the
Company to reach an informed and knowledgeable decision to acquire the Purchased
Securities. The Purchaser has such knowledge and experience in financial and
business matters as to make it capable of utilizing such information to evaluate
the risks of the prospective investment and to make an informed investment
decision with respect thereto. The Purchaser is able to bear the economic risk
of its investment in the Purchased Securities.
6.5 ERISA. No part of the funds used by the Purchaser to purchase the
Preferred Shares and Warrant hereunder constitutes assets of any "employee
benefit plan" (as defined in Section 3(3) of ERISA) or "plan" (as defined in
Section 4975 of the Code).
6.6 Broker's, Finder's or Similar Fees. There are no brokerage
commissions, finder's fees or similar fees or commissions payable in connection
with the transactions contemplated hereby, or by any other Transaction Document
to which the Purchaser is a party, based on any agreement, arrangement or
understanding with the Purchaser or any action taken by the Purchaser.
6.7 Governmental Authorization; Third Party Consent. Except as
contemplated by the Transaction Documents, no approval, consent, compliance,
exemption, authorization or other action by, or notice to, or filing with, any
Governmental Authority or any other Person in respect of any Requirement of Law,
and no lapse of a waiting period under a Requirement of Law, is necessary or
required in connection with the execution, delivery or performance by the
Purchaser or enforcement against the Purchaser of this Agreement or the
transactions contemplated hereby.
<PAGE> 26
ARTICLE 7
FINANCIAL INFORMATION AND NOTICES
Until such time as none of the Preferred Shares is outstanding, the
Company hereby covenants and agrees with the Purchaser as follows:
7.1 Financial Statements and Other Information. The Company shall
deliver to the Purchaser:
(a) Monthly Financials. As soon as available and in any event
within 30 days after the end of each month, the consolidated balance sheet of
the Company and its Subsidiaries as at the end of such month and the related
consolidated statements of income, stockholders' equity and cash flow for such
month and for the period from the beginning of the then current fiscal year to
the end of such month.
(b) Year-End Financials. As soon as available and in any event
within 90 days after the end of each fiscal year, (i) the consolidated balance
sheet of the Company and its Subsidiaries as at the end of such year and the
related consolidated statements of income, stockholders' equity and cash flow
for such fiscal year, and (ii) a report with respect to the financial statements
from a "Big Six" accounting firm selected by the Company, which report shall be
without qualification and shall state that (A) such consolidated financial
statements present fairly the consolidated financial position of the Company and
its Subsidiaries as at the dates indicated and the results of their operations
and cash flow for the periods indicated in conformity with GAAP applied on a
basis consistent with prior years and (B) that the examination by such
accountants in connection with such consolidated financial statements has been
made in accordance with generally accepted auditing standards.
(c) Compliance Certificate. Together with each delivery of
financial statements pursuant to Section 7.1(a) and (b) above, a fully and
properly completed compliance certificate signed by the chief executive officer
or chief financial officer of the Company certifying that the Company and its
Subsidiaries are in compliance with each of the covenants contained in Articles
9 and 10 hereof.
(d) Accountants' Reports. Promptly upon receipt thereof, copies
of all significant reports submitted to the Company or any of its Subsidiaries
by independent public accountants in connection with each annual, interim or
special audit of the financial statements of the Company and its Subsidiaries
made by such accountants, including the comment letter submitted by such
accountants to management in connection with their annual audit.
(e) Management Report. Together with each delivery of financial
statements of the Company and its Subsidiaries pursuant to Section 7.1(a) and
(b) above, a management report: (i) describing the operations and financial
condition of the Company and its Subsidiaries for the month then ended and the
portion of the current fiscal year then elapsed (or for the fiscal year then
ended in the case of year-end financials), (ii) setting forth in comparative
form the corresponding figures for the corresponding periods of the previous
fiscal year and the corresponding figures from
<PAGE> 27
the most recent projections for the current fiscal year delivered to the
Purchaser pursuant to Section 7.1(g) and (iii) discussing the reasons for any
significant variations. The information above shall be presented in reasonable
detail and shall be certified by the chief financial officer of the Company to
the effect that such information (including the financial statements of the
Company and its Subsidiaries delivered pursuant to Section 7.1(a) and (b))
fairly presents the results of operations and financial condition of the Company
and its Subsidiaries as at the dates and for the periods indicated, except for
normal year-end audit adjustments.
(f) Annual Budget. As soon as available and in any event no later
than 30 days after the end of each fiscal year of the Company, a business plan
of the Company and its Subsidiaries for the ensuing fiscal year, such plan to
include, on a quarterly basis, the following: a quarterly operating and capital
budget, a projected quarterly income statement, statement of cash flows and
balance sheet and a report containing management's discussion and analysis of
such projections, accompanied by a certificate from the chief financial officer
of the Company to the effect that such projections have been prepared on the
basis of sound financial planning practice and that such chief financial officer
has no reason to believe that such projections are incorrect in any material
respect.
(g) SEC Filings and Press Releases. Promptly upon their becoming
available, copies of: (i) all financial statements, reports, notices and proxy
statements sent or made available by the Company or any of its Subsidiaries to
their securityholders as a class, (ii) all regular and periodic reports and all
registration statements and prospectuses, if any, filed by the Company or any of
its Subsidiaries with any securities exchange, the Commission or any state
securities commission and (iii) all press releases concerning developments in
the business of any such Person.
(h) Other Information. With reasonable promptness, such other
information and data with respect to each Related Company as from time to time
may be reasonably requested by the Purchaser (including any budgets, reports or
other information prepared and delivered, or required to be delivered, to the
Company pursuant to any Management Services Agreement).
(i) Notices. Prompt (but in no event later than 10 days after an
executive officer of the Company obtains knowledge thereof) written notice of:
(i) the commencement of all material proceedings and investigations by or before
any Governmental Authority (including any notice of violation of any material
Requirement of Law) and all actions and proceedings in any court or before any
arbitrator against or involving any Related Company or any of their respective
properties, assets or businesses, in each case involving a claim or liability in
excess of $100,000 and not fully covered by insurance, (ii) any labor
controversy that has resulted in or reasonably likely to result in, a strike or
other work action against any Related Company, (iii) any attachment, judgment,
levy or order exceeding $100,000 that could reasonably be expected to be
assessed against any Related Company, (iv) any material breach of any party
under any Management Services Agreement or any other Material Contract and (v)
any act or condition arising under ERISA that might constitute grounds for the
termination of any Employee Benefit Plan or for the appointment by the
appropriate United States District Court of a trustee to administer such plan,
and (vi) any event which makes any of the representations set forth in Section 5
inaccurate in any material respect.
<PAGE> 28
ARTICLE 8
RIGHT OF FIRST REFUSAL
8.1 Eligible Offering. Except as otherwise provided in Section 8.4, the
Company hereby grants to the Purchaser the right, from the Closing Date through
and including the date of the initial Qualified Public Offering, to purchase a
portion (the "Purchaser's Portion") of the equity securities being offered in
any future offering of equity securities of the Company or of any security or
other obligation convertible into or exchangeable for or carrying rights or
options to purchase equity securities of the Company (an "Eligible Offering") on
terms and conditions no less favorable than those available to any other Person
under the Eligible Offering; provided, that the Purchaser's Portion which the
Purchaser may purchase shall equal a number which is the product of (a) the
aggregate number of the equity securities to be offered in the Eligible Offering
times (b) the quotient (calculated before giving effect to the proposed
offering) of (i) the number of shares of Common Stock owned by the Purchaser, on
a fully diluted basis and including any shares of Common Stock issuable upon
exercise of any warrants, options or other rights to acquire shares of Common
Stock owned by the Purchaser and (ii) the total number of shares of Common Stock
of the Company issued and outstanding on a fully diluted basis and including any
shares of Common Stock issuable upon exercise of any warrants, options or other
rights to acquire shares of Common Stock owned by any Person (including the
Purchaser).
8.2 Notice of an Eligible Offering. Before issuing any securities
pursuant to an Eligible Offering, the Company shall give written notice thereof
to the Purchaser. Such notice must specify the security or securities the
Company proposes to issue and the consideration that the Company intends to
receive for such security or securities. For a period of twenty (20) days
following the delivery of such notice, the Purchaser shall be entitled, by
written notice to the Company, to purchase the Purchaser's Portion, determined
in accordance with Section 8.1. If any such election is made by the Purchaser,
the Company shall sell to the Purchaser, and the Purchaser shall purchase from
the Company, for the consideration and on the terms set forth in the Company's
notice of such Eligible Offering, which shall be no less favorable than those
available to any other Person under the Eligible Offering, the number of
securities that the Purchaser has elected to purchase. The Company may sell the
remainder of the securities to be sold in the Eligible Offering pursuant to the
provisions set forth in Section 8.3.
8.3 Sale to Third Parties. If any election by the Purchaser to exercise
the rights pursuant to Section 8.1 is not made with respect to any securities
included in an Eligible Offering within the twenty (20) day period described in
Section 8.2, or if there remain securities to be sold after the sale of
securities to the Purchaser, then the Company may issue such securities to third
persons, but only for a consideration not less than that set forth in the
Company's notice and only within a period of 90 days thereafter.
8.4 Exceptions to Eligible Offering. The Purchaser shall not have any
right of first refusal to purchase any of the following securities issued by the
Company:
<PAGE> 29
(a) Securities issued pursuant to the Stock Option Plans; provided, that
the aggregate number of shares of Common Stock available or issued pursuant to
such Stock Option Plans shall not exceed 3,500,000 shares of Common Stock;
(b) Securities issued to the acquiree or to stockholders in connection
with any merger, consolidation or acquisition to which the Company is a party;
or
(c) Securities issued pursuant to a Qualified Public Offering.
ARTICLE 9
AFFIRMATIVE COVENANTS
Until such time as none of the Preferred Shares is outstanding, the
Company shall and shall cause each other Related Company to:
9.1 Preservation of Corporate Existence and Related Matters. Preserve
and maintain its separate existence and all rights, franchises, licenses and
privileges necessary to the conduct of its business; and qualify and remain
qualified as a foreign corporation and authorized to do business in each
jurisdiction in which the character of its properties or the nature of its
business requires such qualification or authorization, except in each case to
the extent that the failure to so preserve and maintain or to remain so
qualified could not reasonably be expected to have a Material Adverse Effect.
9.2 Maintenance of Property. Protect and preserve all properties
necessary and material to its business, including copyrights, patents, trade
names and trademarks; maintain in good working order and condition (ordinary
wear and tear excepted) all buildings, equipment and other tangible real and
personal property necessary and material to its business; and from time to time
make or cause to be made all renewals, replacements and additions to such
property necessary for the conduct of its business so that the business carried
on in connection therewith may be properly and advantageously conducted at all
times, the failure of which could not reasonably be expected to have a Material
Adverse Effect.
9.3 Maintenance of Insurance. Maintain insurance with responsible
insurance companies against such risks and in such amounts as are customarily
maintained by similar businesses, including without limitation property,
business interruption, medical malpractice and director and officers' liability
insurance, or as may be required by any Requirement of Law or any material
Contractual Obligation.
9.4 Payment of Taxes and Governmental Charges. Pay or perform all
material taxes, assessments and other governmental charges that may be levied or
assessed upon it or any of its property (including, without limitation,
withholding, social security, payroll and similar employment related taxes on
the dates such taxes are due) unless any such Person is contesting such taxes,
assessments and other governmental charges in good faith and adequate reserves
are maintained with respect thereto in accordance with GAAP.
<PAGE> 30
9.5 Accounting Methods and Financial Records. Maintain a system of
accounting, and keep such books, records and accounts as may be required or as
may be necessary to permit the preparation of financial statements in accordance
with GAAP consistently applied and in compliance with the regulations of any
Governmental Authority having jurisdiction over it or any of its properties.
9.6 Compliance With Laws and Obligations. Observe and remain in material
compliance with all material Requirements of Law and material Contractual
Obligations and maintain in full force and effect all material approvals of
Governmental Authorities, in each case applicable or necessary to the conduct of
its business, including timely filing of all reports required to be filed with
the Commission.
9.7 Environmental Management. In addition to and without limiting the
generality of Section 9.6, (a) in all material respects, comply with, and insure
compliance by all tenants and subtenants, if any, with, all Environmental Laws
and obtain and comply with and maintain, and insure that all tenants and
subtenants obtain and comply with and maintain, any and all material licenses,
approvals, registrations or permits required by Environmental Laws, (b) conduct
and complete all investigations, studies, sampling and testing, and all
remedial, removal and other actions required under Environmental Laws and
promptly comply in all material respects with all lawful orders and directives
of all Governmental Authorities respecting Environmental Laws and Hazardous
Materials, and (c) provide the Purchaser with prompt written notice of any
material investigation or inquiry or notice of violation of any Environmental
Law.
9.8 Visits and Inspections. In addition to and without limiting the
rights of the Purchaser under Section 9.10, permit representatives of the
Purchaser, from time to time, as often as may be reasonably requested, but only
during normal business hours and upon reasonable prior notice, to visit and
inspect its properties; inspect, audit and make extracts from its books, records
and files, including, but not limited to, management letters prepared by
independent accountants; and discuss with its principal officers and its
independent accountants, its business, assets, liabilities, financial condition,
results of operations and business prospects.
9.9 Use of Proceeds. Use the proceeds of the sale of the Preferred
Shares and the Warrant hereunder only (a) to obtain financing to capitalize the
Company and to refinance certain of the Company's existing indebtedness, (b) for
the payment of fees and expenses in connection with the transactions
contemplated by the Transaction Documents, (c) to provide for ongoing working
capital for capital spending and acquisition needs and (d) for other purposes in
compliance with the regulations of the United States Small Business
Administration; provided that the Company shall not use any of the proceeds of
the Purchase Price to repay any indebtedness of any Related Company except in
accordance with Section 9.10(a).
9.10 Certain Post-Closing Obligations. (a) The Company shall (i)
participate in discussions with the Purchaser regarding the refinancing of the
indebtedness of the Company, (ii) adopted a written plan for such refinancing in
form and substance reasonably satisfactory to the Purchaser within 90 days after
the Closing Date and (iii) not use the proceeds of the Purchase Price to repay
any indebtedness of any Related Company without the prior written consent of the
Purchaser. That certain letter from the Purchaser to the Company dated July 7,
1997 shall constitute
<PAGE> 31
such written consent for the use of proceeds of the Purchase Price by the
Company to repay certain indebtedness of the Company as specified therein due to
the United States National Bank of Oregon on the conditions set forth in such
letter.
(b) The Company shall participate in discussions with the Purchaser
regarding its hiring of a chief operating officer in manner and substance
reasonably satisfactory to the Purchaser (including the engagement of a national
search firm reasonably satisfactory to the Purchaser to assist in such efforts
within 30 days after the Closing Date).
(c) The Company shall engage an independent third party appraiser
(reasonably acceptable to the Purchaser) to determine within 30 days after the
Closing Date the fair market value of (i) a share of Class A Common Stock as of
February 1, 1997 (the "Merger Date Value Per Share") and (ii) a share of Class B
Common Stock as of the Closing Date (the "Closing Date Value Per Share"). For
purposes of establishing the Closing Date Value Per Share, the Class B Common
Stock shall be assumed to be identical in all respects to the Class A Common
Stock. The Merger Date Value Per Share shall not be set below $6.00 per share
and shall be subject to the prior approval of the Purchaser, which shall not be
unreasonably withheld. The Closing Date Value Per Share shall not be set below
$8.00 per share and shall be subject to the prior approval of the Purchaser,
which shall not be unreasonably withheld. The Company shall set the per share
exercise price for any stock options to acquire Common Stock granted or awarded
under the Stock Option Plans prior to the date hereof (including all such
options designated in Schedule 5.5. hereto) at a price per share no lower than
the Merger Date Value Per Share determined pursuant to this Section 9.10(c). The
Closing Date Value Per Share established pursuant to this Section 9.10(c) shall
become the Closing Date Value Per Share referred to in Section 15 of the
Warrant.
ARTICLE 10
NEGATIVE COVENANTS
Until such time as none of the Preferred Shares is outstanding, the
Company hereby covenants and agrees with the Purchaser as follows:
10.1 Certain Amendments. The Company shall not (a) assign or terminate
any Management Services Agreement, or amend or otherwise modify any Management
Services Agreement so as to (i) shorten the term thereof, (ii) reduce the
management fees and expenses for which any New PC is liable thereunder
(including any reduction in the applicable percentage of revenues or collections
by which such management fees are calculated) or (iii) modify the
non-competition, non-solicitation or confidentiality provisions thereof (except
for any such modification that would increase the protection afforded to the
Company by any such provision); (b) amend or otherwise modify any Employment
Agreement or the Change in Control Plan (or any agreements thereunder) so as to
increase the compensation otherwise payable thereunder; (c) amend the Company
Charter Documents if such amendment would impair any
<PAGE> 32
rights of the Purchaser under any Transaction Document or would reasonably be
expected to have a Material Adverse Effect; or (d) terminate, amend or otherwise
modify any Material Contract (or permit any such termination, amendment or
modification) if such termination, amendment or modification would impair any
rights of the Purchaser under any Transaction Document or could reasonably be
expected to have a Material Adverse Effect.
10.2 No Inconsistent Agreements. The Company shall not enter into any
Contractual Obligation, or enter into any amendment or other modification to any
Contractual Obligation, which by its terms restricts or prohibits the ability of
the Company to (a) redeem the Preferred Shares in accordance with the terms of
the Certificate of Designation or (b) take any other action otherwise permitted
pursuant to this Agreement and the Certificate of Designation.
10.3 Certain Transactions. Except as described in the Transaction
Documents and the other Material Contracts, each as in effect on the date
hereof, the Company shall not, and shall not permit any other Related Company
to, (a) make any payment (by way of dividend, distribution, compensation or
otherwise) to any of its employees, directors, stockholders or Affiliates or,
with respect to the Company, any New PC, (b) pay any deferred compensation on an
accelerated basis or (c) enter into any other material transaction with any of
its executive officers, directors, stockholders or Affiliates unless, in the
case of clause (c) hereof, such transaction is in the ordinary course of
business of the Company or such Related Company and upon fair and reasonable
terms that are no less favorable to it than it would obtain in an arm's length
transaction with an unrelated Person.
ARTICLE 11
INDEMNIFICATION
11.1 Indemnification. (a) In addition to all other sums due hereunder or
provided for in this Agreement, the Company agrees to indemnify and hold
harmless the Purchaser and its Affiliates and its officers, directors, agents,
employees, subsidiaries, partners and controlling persons (each, an "Indemnified
Purchaser Party") to the fullest extent permitted by law, from and against any
and all losses, claims, damages, expenses (including reasonable fees,
disbursements and other charges of counsel) or other liabilities (collectively,
"Liabilities") resulting from or arising out of any breach of any representation
or warranty, covenant or agreement of the Company in this Agreement; provided,
that the Company shall not be liable under this Section 11.1(a) to an
Indemnified Purchaser Party: (a) for any amount paid in settlement of claims
without the Company's prior written consent, (b) to the extent that it is
finally judicially determined that such Liabilities resulted from the willful
misconduct or gross negligence of such Indemnified Purchaser Party or (c) to the
extent that it is finally judicially determined that such Liabilities resulted
from the material breach by such Indemnified Purchaser Party of any
representation, warranty, covenant or other agreement of such Indemnified
Purchaser Party contained herein; and provided, further, that if and to the
extent that such indemnification is unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of such
Liabilities which shall be permissible under applicable laws.
(b) In addition to all other sums due hereunder or provided for in this
Agreement, the Purchaser agrees to indemnify and hold harmless the Company and
its Affiliates and its officers, directors, agents, employees, subsidiaries,
partners and controlling persons (each, an "Indemnified Company Party" and
together with any Indemnified Purchaser Party, an "Indemnified Party") to the
fullest extent permitted by law, from and against any and all Liabilities
resulting from or arising out
<PAGE> 33
of any breach of any representation or warranty, covenant or agreement of the
Purchaser in this Agreement; provided, that the Purchaser shall not be liable
under this Section 11.1(b) to an Indemnified Company Party: (a) for any amount
paid in settlement of claims without the Company's prior written consent, (b) to
the extent that it is finally judicially determined that such Liabilities
resulted from the willful misconduct or gross negligence of such Indemnified
Company Party or (c) to the extent that it is finally judicially determined that
such Liabilities resulted from the material breach by such Indemnified Company
Party of any representation, warranty, covenant or other agreement of such
Indemnified Company Party contained herein; and provided, further, that if and
to the extent that such indemnification is unenforceable for any reason, the
Purchaser shall make the maximum contribution to the payment and satisfaction of
such Liabilities which shall be permissible under applicable laws.
11.2 Notification. Each Indemnified Party under this Article 11 will,
promptly after the receipt of notice of the commencement of any action,
investigation, claim or other proceeding against such Indemnified Party in
respect of which indemnity may be sought from either the Company or the
Purchaser ( either in such capacity, the "Indemnitor") under this Article 11,
notify the Indemnitor in writing of the commencement thereof. The omission of
any Indemnified Party so to notify the Indemnitor of any such action shall not
relieve the Indemnitor from any liability which it may have to such Indemnified
Party (a) other than pursuant to this Article 11 or (b) under this Article 11
unless, and only to the extent that, such omission results in the Indemnitor's
forfeiture of substantive rights or defenses or the Indemnitor is otherwise
irrevocably prejudiced in defending such proceeding. In case any such action,
claim or other proceeding shall be brought against any Indemnified Party and it
shall notify the Indemnitor of the commencement thereof, the Indemnitor shall be
entitled to assume the defense thereof at its own expense, with counsel
satisfactory to such Indemnified Party in its reasonable judgment; provided,
that any Indemnified Party may, at its own expense, retain separate counsel to
participate in such defense. Notwithstanding the foregoing, in any action, claim
or proceeding in which both the Indemnitor, on the one hand, and an Indemnified
Party, on the other hand, is, or is reasonably likely to become, a party, such
Indemnified Party shall have the right to employ separate counsel at the
Indemnitor's expense and to control its own defense of such action, claim or
proceeding if, in the reasonable written opinion of counsel to such Indemnified
Party, a conflict or potential conflict exists between the Indemnitor, on the
one hand, and such Indemnified Party, on the other hand, that would make such
separate representation reasonably necessary and adequate to protect the rights
and interest of such Indemnified Party. The Company and the Purchaser each agree
that they will not, without the prior written consent of the other party hereto,
settle, compromise or consent to the entry of any judgment in any pending or
threatened claim, action or proceeding relating to the matters contemplated
hereby (if any Indemnified Purchaser Party with respect to the Company or any
Indemnified Company Party with respect to the Purchaser is a party thereto or
has been actually threatened to be made a party thereto) unless such settlement,
compromise or consent includes an unconditional release of the Company or
Purchaser and each other applicable Indemnified Party from all liability arising
or that may arise out of such claim, action or proceeding; provided, that such
claim, action or proceeding did not arise out of (i) the willful misconduct or
gross negligence of such Indemnified Party or (ii) the material breach by such
Indemnified Party of any representation, warranty, covenant or other agreement
of such Indemnified Party contained in this Agreement. Neither the Company nor
the Purchaser shall be liable for any settlement of any claim, action or
proceeding effected against an applicable Indemnified Party without its written
consent. The rights accorded to Indemnified Parties hereunder
<PAGE> 34
shall be in addition to any rights that any Indemnified Party may have at common
law, by separate agreement or otherwise.
ARTICLE 12
CONFIDENTIAL INFORMATION
12.1 Confidential Information. (a) The Purchaser hereby acknowledges
that the Purchaser has had and may continue to have access to and knowledge of
information of a confidential and proprietary nature relating to each Related
Company, including, without limitation, accounting and financial data (including
information regarding charges for services and products provided by each Related
Company to patients and other pricing and income and revenue information of such
Related Company), computer programs, contractual arrangements, business plans
and budgets relating to strategic planning, marketing programs and service
development activities, all of which have value to such Related Company, as the
case may be, and the disclosure of which to competitors of such Related Company
could result in harm to such Related Company. The information of a confidential
and proprietary nature described in this Section 12.1(a) is referred to in this
Agreement, collectively, as "Confidential Information." Confidential Information
subject to the provisions of this Section 12.1 does not include (i) information
which is or becomes publicly available other than as a result of the Purchaser's
failure to comply with this Section 12.1, (ii) information that is obtained from
a third party unrelated to the Company or any other Related Company which is not
known to the Purchaser to be prohibited from transmitting such information to
the Purchaser on a nonconfidential basis, (iii) information which is in the
Purchaser's possession prior to its receipt from the Company or any other
Related Company or (iv) information which is independently developed by the
Purchaser or any of its Affiliates.
(b) The Purchaser acknowledges and agrees that the Confidential
Information is the property of the Company or one or more of the other Related
Companies and the Purchaser only has access to the Confidential Information as a
result of its proposed investment in the Company. The Purchaser hereby agrees
that, at all times hereafter, the Purchaser will not (i) disclose, reveal or
communicate, without the express written consent of the Company, all or any
portion of the Confidential Information disclosed to the Purchaser, except for
such disclosure as may be required pursuant to court order, Requirements of Law
or as otherwise expressly permitted by the terms of this Agreement or (ii)
otherwise use the Confidential Information to the detriment of the Company or
any of the other Related Companies in a manner prohibited by law. The Purchaser
further agrees to disclose Confidential Information only to (i) its agents,
attorneys, accountants and employees who need to know the Confidential
Information for purposes of evaluating the Purchaser's decision to enter into
this Agreement and the other Transaction Documents and any future decisions
related thereto and (ii) its Affiliates for the purpose of providing or
proposing to provide banking services to the Company, and to use reasonable
efforts to cause its agents, attorneys, accountants, employees and Affiliates
not to disclose the Confidential Information in contravention of this Agreement.
The Purchaser shall take all commercially reasonable action that may be
necessary or appropriate to maintain the confidentiality of the Confidential
Information. In the event the Purchaser is informed or becomes aware that any
material Confidential Information has been disclosed (either intentionally or
unintentionally) in violation of this Section 12.1, the Purchaser shall promptly
report such disclosure to the Company.
<PAGE> 35
(c) The Purchaser agrees that, upon termination of all of its rights
under the Transaction Documents and at the written request of the Company, the
Purchaser will promptly deliver to the Company or one or more of the other
Related Companies, as designated by the Company, all originals and copies, in
all forms and mediums, of the Confidential Information and any summaries thereof
then in its possession and will not retain any copies of such Confidential
Information. If the Purchaser is requested or becomes legally compelled to
disclose any Confidential Information, the Purchaser will promptly so notify the
Company in writing so that the Company or one or more other Related Companies
may seek a protective order or take other appropriate action. In the event that
such a protective order or other remedy is not obtained or the Company and any
other Related Company waive in writing compliance with any provision of this
Section 12.1, the Purchaser will use its best efforts to furnish only that
portion of the Confidential Information as is legally required to be so
furnished.
(d) The Purchaser acknowledges and agrees that a breach of any provision
of this Section 12.1 by the Purchaser may result in irreparable harm to the
Company or one or more other Related Companies that cannot be reasonably or
adequately compensated in damages, and, therefore, the Company and the other
Related Companies shall be entitled to seek equitable remedies (including,
without limitation, injunctive relief to prevent a breach and to secure
enforcement thereof), in addition to any other relief or award to which the
Company or any such other Related Company may be entitled.
ARTICLE 13
MISCELLANEOUS
13.1 Survival of Representations and Warranties. All of the
representations and warranties made herein shall survive the execution and
delivery of this Agreement, any investigation by or on behalf of the Purchaser,
acceptance of the Preferred Shares and Warrant and payment therefor, or
termination of this Agreement until the earlier of the second anniversary of the
Closing Date and such time as none of the Preferred Shares is outstanding.
13.2 Notices. All notices, demands and other communications provided for
or permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, telecopier, recognized
overnight courier service or personal delivery:
(a) if to the Company:
Physician Partners, Inc.
111 SW Columbia Street, Suite 725
Portland, Oregon 97201
Attention: Mr. David M. Goldberg
Telecopy No.: (503) 224-4713
<PAGE> 36
(b) if to the Purchaser:
First Union Capital Partners, Inc.
One First Union Center
301 South College Street, 5th Floor
Charlotte, North Carolina 28288-0732
Attention: Frederick W. Eubank, II
D. Neal Morrison
Telecopy No.: (704) 374-6711
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; when delivered by
courier, if delivered by commercial overnight courier service; five Business
Days after being deposited in the mail, postage prepaid, if mailed; and when
receipt is acknowledged, if telecopied.
13.3 Transfer of Preferred Shares. The Preferred Shares may be
transferred, in whole or in part, by any holder thereof to any Person other than
a Company Competitor (any such Person, a "Permitted Transferee") upon ninety
(90) days prior written notice to the Company; provided, that any such Permitted
Transferee acquires, or (if less) all of the then outstanding number of
Preferred Shares held by the transferor, not less than 20% of the then
outstanding number of Preferred Shares; provided further, that in connection
with any such transfer to an Affiliate or successor of the holder, the holder
shall be required to give written notice of such transfer to the Company within
ten (10) days after such transfer.
13.4 Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of the parties
hereto. Subject to applicable securities laws and except as otherwise set forth
in the Transaction Documents, the Purchaser may assign any of its rights under
this Agreement. The Company may not assign any of its rights under this
Agreement without the prior written consent of the Purchaser. Except as provided
in Article 11, no Person other than the parties hereto and their successors and
permitted assigns is intended to be a beneficiary of this Agreement.
13.5 Amendment and Waiver. (a) No failure or delay on the part of the
Company or the Purchaser in exercising any right, power or remedy hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy. The remedies provided for
herein are cumulative and are not exclusive of any remedies that may be
available to the Company or the Purchaser at law, in equity or otherwise.
(b) Any amendment, supplement or modification of or to any provision of
this Agreement, any waiver of any provision of this Agreement, and any consent
to any departure of the Company from the terms of any provision of this
Agreement, shall be effective (i) only if it is made or given in writing and
signed by the Company and the Purchaser in accordance with Section 13.6, and
(ii) only in the specific instance and for the specific purpose for which made
or given. Except where notice is specifically required by this Agreement, no
notice to or demand on the Company in any case shall entitle the Company to any
other or further notice or demand in similar or other circumstances.
<PAGE> 37
13.6 Determinations, Requests or Consents. All determinations, requests,
consents, waivers or amendments to be made by the Purchaser in its opinion or
judgment or with its approval or otherwise pursuant to this Agreement shall be
made upon approval by the holders of at least a majority of the Preferred
Shares.
13.7 Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
13.8 Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
13.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE.
13.10 Jurisdiction. Each party to this Agreement hereby irrevocably
agrees that any legal action or proceeding arising out of or relating to this
Agreement or any agreements or transactions contemplated hereby may be brought
in the courts of the State of North Carolina or of the United States of America
for the Middle District of North Carolina and hereby expressly submits to the
personal jurisdiction and venue of such courts for the purposes thereof and
expressly waives any claim of improper venue and any claim that such courts are
an inconvenient forum. Each party hereby irrevocably consents to the service of
process of any of the aforementioned courts in any such suit, action or
proceeding by the mailing of copies thereof by registered or certified mail,
postage prepaid, to the address set forth in Section 13.2, such service to
become effective 10 days after such mailing.
13.11 Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof.
13.12 Rules of Construction. Unless the context otherwise requires, "or"
is not exclusive, and references to sections or subsections refer to sections or
subsections of this Agreement. All pronouns and any variations thereof refer to
the masculine, feminine or neuter, singular or plural, as the context may
require.
13.13 Entire Agreement. This Agreement, together with the exhibits and
schedules hereto and the other Transaction Documents, is intended by the parties
as a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein and therein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred
<PAGE> 38
to herein or therein. This Agreement, together with the exhibits and schedules
hereto, and the other Transaction Documents supersede all prior agreements and
understandings between the parties with respect to such subject matter.
13.14 Certain Expenses. The Company agrees to pay or reimburse the
Purchaser for all reasonable out-of-pocket costs and expenses (including,
without limitation, reasonable attorneys' fees and expenses) in connection with
the negotiation, preparation, execution and delivery of this Agreement and any
amendment, modification or waiver of any of the terms of this Agreement or any
of the other Transaction Documents or any consent to any departure by the
Company from the terms of any provision of this Agreement or any of the other
Transaction Documents.
13.15 Publicity. Except as may be required by applicable law, none of
the parties hereto shall issue a public release or announcement or otherwise
make any public disclosure concerning this Agreement or the transactions
contemplated hereby, without prior approval by the other parties hereto (which
approval will not be unreasonably withheld). If any announcement is required by
law to be made by any party hereto, prior to making such announcement such party
will deliver a draft of such announcement to the other parties and shall give
the other parties an opportunity to comment thereon.
13.16 Further Assurances. Each of the parties shall execute such
documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations, or other actions by, or
giving any notices to, or making any filings with, any Governmental Authority or
any other Person) as may be reasonably required or desirable to carry out or to
perform the provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Preferred Stock
and Warrant Purchase Agreement to be executed and delivered by their respective
officers hereunto duly authorized as of the date first above written.
PHYSICIAN PARTNERS, INC.
[CORPORATE SEAL]
By:
-------------------------------
David M. Goldberg
President
FIRST UNION CAPITAL PARTNERS, INC.
[CORPORATE SEAL]
By:
-------------------------------
Name:
Title:
<PAGE> 39
THIS COMMON STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE PURCHASED
HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
UNDER THE SECURITIES LAWS OF ANY STATE. THIS COMMON STOCK PURCHASE
WARRANT HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO
DISTRIBUTION, AND THIS COMMON STOCK PURCHASE WARRANT AND THE SHARES THAT
MAY BE PURCHASED HEREUNDER MAY NOT BE SOLD OR OFFERED FOR SALE IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, AND REGISTRATION OR QUALIFICATION UNDER APPLICABLE
STATE SECURITIES LAWS OR A WRITTEN OPINION OF COUNSEL IN FORM AND
SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY THAT THE PROPOSED
TRANSACTION DOES NOT VIOLATE THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933, AND APPLICABLE STATE SECURITIES LAWS.
PHYSICIAN PARTNERS, INC.
COMMON STOCK PURCHASE WARRANT
THIS IS TO CERTIFY that FIRST UNION CAPITAL PARTNERS, INC., a Virginia
corporation, and its transferees, successors and assigns (the "Holder"), for
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, is entitled to purchase from PHYSICIAN PARTNERS, INC., a Delaware
corporation (the "Company"), at a price per share equal to $0.01 (the "Exercise
Price"), at any time after the date hereof (the "Commencement Date"), 1,799,893
shares of the fully paid and nonassessable Class B Common Stock, par value $.01
per share ("Class B Common"), of the Company. The 1,799,893 shares of Class B
Common subject to this Warrant are referred to herein as the "Aggregate Number"
and are subject to reduction and adjustment as set forth herein. Capitalized
terms used herein shall have the meanings ascribed to such terms in Section 15
hereof unless otherwise defined herein.
SECTION 1. The Warrant; Transfer and Exchange.
(a) The Warrant. This Common Stock Purchase Warrant (the "Warrant") is
issued under and pursuant to the Purchase Agreement. This Warrant and the rights
and privileges of the Holder hereunder may be exercised by the Holder (subject
to the rights and privileges of the Company) in whole or in part as provided
herein; shall survive any termination of the Purchase Agreement; and, as more
fully set forth in Sections 1(b) and 10 hereof, may be transferred by the Holder
only to any other Person or Persons at any time or from time to time, in whole
or in part, as provided in Section 10 hereof regardless of whether the Holder
retains any or all rights under the Purchase Agreement.
<PAGE> 40
(b) Transfer and Exchanges. The Company shall initially record this
Warrant on a register to be maintained by the Company with its other stock books
and, subject to Section 10 hereof, from time to time thereafter shall transfer
this Warrant on such register when surrendered for transfer in accordance with
the terms hereof and properly endorsed, accompanied by appropriate written
instructions, and further accompanied by (i) payment in cash or by check, bank
draft or money order payable to the order of the Company, in United States
currency, of an amount equal to all stamp and other taxes and governmental
charges and fees required to be paid in connection with the transfer thereof and
(ii) an instrument of transfer in the form attached hereto as Exhibit B and made
a part hereof. Upon any such transfer, a new warrant or warrants shall be issued
to the transferee and the Holder (in the event the Warrant is only partially
transferred) and the surrendered warrant shall be canceled. Each such transferee
shall succeed to all of the rights of the Holder under the Purchase Agreement;
provided, that the Holder and such transferee may, simultaneously, also hold
rights under the Purchase Agreement in proportion to their respective interests
in this Warrant. This Warrant may be exchanged at the option of the Holder, when
surrendered at the Principal Office of the Company, for another warrant or other
warrants of like tenor and representing in the aggregate the right to purchase a
like number of shares of Class B Common, subject to adjustment as more fully set
forth herein.
SECTION 2. Reduction in Aggregate Number. If the Company redeems all of
the outstanding Series B Preferred in one or more redemptions (any redemption
resulting in the redemption of all of the outstanding Series B Preferred being
referred to as a "Qualified Redemption") during any of the periods set forth
below, the Aggregate Number of Warrant Shares for which this Warrant may be
exercised shall be reduced to the Aggregate Number of Warrant Shares equal to
(a) the Aggregate Number in effect as of the date of such Qualified Redemption
times (b) the percentage corresponding to the date of such Qualified Redemption
set forth below:
<TABLE>
<CAPTION>
Date of Qualified Redemption Percentage
---------------------------- ----------
<S> <C>
Commencement Date to June 30, 1998 38.22%
July 1, 1998 to June 30, 1999 52.38%
July 1, 1999 to June 30, 2000 67.35%
After June 30, 2000 0% (i.e., no reduction)
</TABLE>
If the Holder is the owner of any Series B Preferred and makes any Series B
Elective Redemption pursuant to the Certificate of Incorporation prior to June
30, 2000 (and the Company has not then effected a Qualified Redemption), the
Aggregate Number of Warrant Shares shall be reduced as if the Company had
effected a Qualified Redemption on the date of consummation of the Series B
Elective Redemption. In order to accommodate any prospective reduction in the
Aggregate Number as provided in this Section 2, the Holder shall not, prior to
June 30, 2000, exercise this Warrant as to any portion of the Aggregate Number
which may be subject to reduction as provided herein; provided, that this
Warrant may be exercised as to all Warrant Shares covered hereby (subject to any
reduction resulting from any concurrent redemption of the Series B Preferred) at
any time after the fifth (5th) Business Day after the occurrence of any event
with respect to which the Required Holders may exercise their put right pursuant
to Section 11(b) hereof.
<PAGE> 41
SECTION 3. Exercise.
(a) Right to Exercise. Subject to Section 2, at any time after the
Commencement Date and on or before the Expiration Date, the Holder, in
accordance with the terms hereof, may exercise this Warrant, in whole at any
time or in part from time to time, by delivering this Warrant to the Company
during normal business hours on any Business Day at the Company's Principal
Office, together with the Notice of Exercise, in the form attached hereto as
Exhibit A and made a part hereof (the "Notice of Exercise"), duly executed, and
payment of the Exercise Price per share for the number of shares to be purchased
(the "Exercise Amount"), as specified in the Notice of Exercise. If the
Expiration Date is not a Business Day, then this Warrant may be exercised on the
next succeeding Business Day.
(b) Payment of Exercise Price. Payment of the Aggregate Exercise Price
(as defined below) shall be made to the Company in cash or other immediately
available funds or as provided in Section 3(c), or a combination thereof. In the
case of payment of all or a portion of the Aggregate Exercise Price pursuant to
Section 3(c), the written direction by the Holder to make a "Cashless Exercise"
shall serve as accompanying payment for that portion of the Aggregate Exercise
Price. The amount to be paid upon exercise (the "Aggregate Exercise Price")
shall equal the product of (i) the Exercise Amount multiplied by (ii) the
Exercise Price.
(c) Cashless Exercise. The Holder shall have the right to pay all or a
portion of the Aggregate Exercise Price by making a "Cashless Exercise" pursuant
to this Section 3(c), in which case the portion of the Aggregate Exercise Price
to be so paid shall be paid by reducing the number of shares of Class B Common
otherwise issuable pursuant to the Notice of Exercise by an amount equal to (i)
the Exercise Price to be so paid divided by (ii) the Fair Market Value Per
Share. The number of shares of Class B Common to be issued to the Holder as a
result of a Cashless Exercise will therefore be as follows:
(Fair Market Value Per
Share-Exercise Price per share)
x Cashless Exercise Amount*
Fair Market Value Per Share
* The Cashless Exercise Amount in the above formula is that portion of the
Exercise Amount (expressed as a number of shares of Class B Common) with
respect to which the Aggregate Exercise Price is being paid by Cashless
Exercise pursuant to this Section 3(c).
(d) Issuance of Shares of Common Stock. Upon receipt by the Company of
this Warrant at its Principal Office in proper form for exercise, and
accompanied by payment of the Exercise Price as aforesaid, the Holder shall be
deemed to be the holder of record of the shares of Class B Common issuable upon
such exercise, notwithstanding that certificates representing such shares of
Class B Common may not then be actually delivered. Upon such surrender of this
Warrant and payment of the Aggregate Exercise Price as aforesaid, the Company
shall issue and cause to be delivered with all reasonable dispatch to, or upon
the written order of, the Holder (and in such name or names as the Holder may
designate) a certificate or certificates for the Exercise Amount, subject to any
reduction as provided in Section 3(c) for a Cashless Exercise.
<PAGE> 42
(e) Fractional Shares. The Company shall not be required to deliver
fractions of shares of Class B Common upon exercise of this Warrant. If any
fraction of a share of Class B Common would be deliverable upon an exercise of
this Warrant, the Company may, in lieu of delivering such fraction of a share of
Class B Common, make a cash payment to the Holder in an amount equal to the same
fraction multiplied by the Fair Market Value Per Share determined as of the
Business Day immediately preceding the date of exercise of this Warrant.
(f) Partial Exercise. In the event of a partial exercise of this
Warrant, the Company shall issue to the Holder a Warrant in like form for the
unexercised portion thereof.
SECTION 4. Payment of Taxes. The Company shall pay all stamp taxes
attributable to the initial issuance of shares or other securities issuable upon
the exercise of this Warrant or issuable pursuant to Section 7 hereof, excluding
any tax or taxes which may be payable because of the transfer involved in the
issuance or delivery of any certificates for shares or other securities in a
name other than that of the Holder in respect of which such shares or securities
are issued.
SECTION 5. Replacement Warrant. In case this Warrant is mutilated, lost,
stolen or destroyed, the Company shall issue and deliver in exchange and
substitution for and upon cancellation of the mutilated Warrant, or in lieu of
and in substitution for the Warrant lost, stolen or destroyed, a new Warrant of
like tenor and representing an equivalent right or interest, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss, theft
or destruction of such Warrant and upon receipt of indemnity reasonably
satisfactory to the Company (provided that in the case of the Original Holder,
its own agreement shall be satisfactory).
SECTION 6. Reservation of Common Stock and Other Covenants.
(a) Reservation of Authorized Common Stock. The Company shall at all
times reserve and keep available out of the aggregate of its authorized but
unissued shares, free of preemptive rights, such number of its duly authorized
shares of Common Stock, or other stock or securities deliverable pursuant to
Section 7 hereof, as shall be sufficient to enable the Company at any time to
fulfill all of its obligations under this Warrant.
(b) Affirmative Actions to Permit Exercise and Realization of Benefits.
If any shares of Class B Common reserved or to be reserved for the purpose of
the exercise of this Warrant, or any shares or other securities reserved or to
be reserved for the purpose of issuance pursuant to Section 7 hereof, require
registration with or approval of any governmental authority under any federal or
state law before such shares or other securities may be validly delivered upon
exercise of this Warrant, then the Company covenants that it will, at its sole
expense, use its good faith efforts to attempt to secure such registration or
approval, as the case may be (including but not limited to making necessary
filings in order to secure approvals or expirations of waiting periods required
under the Hart-Scott-Rodino Antitrust Improvements Act).
(c) Regulatory Requirements and Restrictions. In the event of any
reasonable determination by the Holder that, by reason of any existing or future
federal or state law, statute, rule, regulation, guideline, order, court or
administrative ruling, request or directive (whether or not having the force of
law and whether or not failure to comply therewith would be unlawful)
<PAGE> 43
(collectively, a "Regulatory Requirement"), the Holder is effectively restricted
or prohibited from holding this Warrant or the Warrant Shares (including any
shares of capital stock or other securities distributable to the Holder in any
merger, reorganization, readjustment or other reclassification), or otherwise
realize upon or receive the benefits intended under this Warrant, the Company
shall cooperate with the Holder in such action as the Holder may deem reasonably
necessary to permit the Holder to comply with such Regulatory Requirement;
provided, that nothing contained in this Section 6(c) shall be construed to
prohibit any director or officer of the Company from discharging his or her
fiduciary duty to the Company or its shareholders. The costs of taking such
action, whether by the Company, the Holder or otherwise, shall be borne by the
Holder. The Holder shall give written notice to the Company of any such
determination and the action or actions necessary to comply with such Regulatory
Requirement, together with a written opinion of counsel for such Holder to the
effect that the proposed action or actions are necessary to comply with such
Regulatory Requirement, and the Company shall use its good faith efforts to
facilitate the Holder's compliance with such Regulatory Requirement as
expeditiously as possible.
(d) Validly Issued Shares. The Company covenants that all shares of
Common Stock that may be delivered upon exercise of this Warrant (including
those issued pursuant to Section 7 hereof) shall upon delivery by the Company be
duly authorized and validly issued, fully paid and nonassessable, free from all
taxes, liens and charges with respect to the issue or delivery thereof and
otherwise free of all other security interests, encumbrances and claims of any
nature whatsoever.
SECTION 7. Adjustments to Aggregate Number. Under certain conditions,
the Aggregate Number is subject to adjustment as set forth in this Section 7. No
adjustments shall be made under this Section 7 as a result of (a) the issuance
by the Company of the Warrant Shares upon exercise of this Warrant, (b) the
conversion of the Class A Common into the Class B Common as permitted under the
Certificate of Incorporation or (c) the issuance of up to 3,500,000 shares of
Class A Common pursuant to the Stock Option Plans.
(a) Adjustments. The Aggregate Number, after taking into consideration
any prior adjustments pursuant to this Section 7, shall be subject to adjustment
from time to time as follows and, thereafter, as adjusted, shall be deemed to be
the Aggregate Number hereunder.
(i) Stock Dividends, Subdivisions and Combinations. In case at
any time or from time to time the Company shall:
(A) pay or otherwise distribute to the holders of its Common
Stock a dividend, or other distribution of, Common Stock (a "Stock
Dividend"),
(B) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, including without
limitation by means of a stock split (a "Stock Subdivision"), or
(C) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock (a "Stock Combination"),
<PAGE> 44
then the Aggregate Number in effect immediately prior thereto shall be (1)
proportionately increased in the case of a Stock Dividend or a Stock Subdivision
and (2) proportionately decreased in the case of a Stock Combination. In the
event the Company shall declare or pay, without consideration, any dividend on
the Common Stock payable in any right to acquire Common Stock for no
consideration, then the Company shall be deemed to have made a Stock Dividend in
an amount of shares equal to the maximum number of shares issuable upon exercise
of such rights to acquire Common Stock.
(ii) Other Distributions. In case at any time or from time to
time the Company shall pay or otherwise distribute to the holders of its Common
Stock any dividend or other distribution (collectively, a "Distribution") of:
(A) cash (other than regular cash dividends declared and paid in
the ordinary course of business of the Company),
(B) any evidences of its indebtedness (other than Convertible
Securities), any shares of its capital stock (other than additional
shares of Common Stock or Convertible Securities) or any other
securities or property of any nature whatsoever (other than cash),
or
(C) any options, warrants or other rights to subscribe for or
purchase any of the following: any evidences of Indebtedness (other
than Convertible Securities), any shares of its capital stock (other
than additional shares of Common Stock or Convertible Securities) or
any other securities or property of any nature whatsoever,
then the Holder shall be entitled to elect by written notice to the Company to
receive (1) immediately and without further payment the cash, evidences of
indebtedness, stock, securities, other property, options, warrants and/or other
rights (or any portion thereof) to which the Holder would have been entitled by
way of such Distribution as if the Holder had exercised this Warrant immediately
prior to the record date with respect to such Distribution or (2) upon the
exercise of this Warrant at any time on or after the taking of a record of the
holders of the Common Stock for the purpose of determining the shareholders
entitled to receive such Distribution, the number of Warrant Shares to be
received upon exercise of this Warrant determined as stated herein and, in
addition and without further payment, the cash, evidences of indebtedness,
stock, securities, other property, options, warrants and/or other rights (or any
portion thereof) to which the Holder would have been entitled by way of such
Distribution and subsequent dividends and distributions through the date of
exercise as if such Holder (x) had exercised this Warrant immediately prior to
the record date with respect to such Distribution and (y) had retained the
Distribution in respect of the Common Stock and all subsequent dividends and
distributions of any nature whatsoever in respect of any stock or securities
paid as dividends and distributions and originating directly or indirectly from
such Common Stock.
A reclassification of the Common Stock into shares of Common Stock and
shares of any other class of stock shall be deemed a Distribution by the Company
to the holders of its Common Stock of such
<PAGE> 45
shares of such other class of stock and, if the outstanding shares of Common
Stock shall be changed into a larger or smaller number of shares of Common Stock
as a part of such reclassification, such event shall be deemed a Stock
Subdivision or Stock Combination, as the case may be, of the outstanding shares
of Common Stock within the meaning of Section 7(a)(i) hereof.
(iii) Issuance of Common Stock. If at any time or from time to
time the Company shall (except as hereinafter provided in this Section
7(a)(iii)) issue or sell any additional shares of Common Stock for a
consideration per share which is the lesser of the Closing Date Value Per Share
or the Fair Market Value Per Share (such lesser value, the "Transaction Value
Per Share") then, effective on the date specified below, the Aggregate Number
shall be adjusted by multiplying (A) the Aggregate Number immediately prior
thereto by (B) a fraction, the numerator of which shall be the sum of the number
of shares of Common Stock outstanding immediately prior to the issuance of such
additional shares of Common Stock, the number of shares of Common Stock issuable
upon the conversion or exercise of options, warrants, rights or convertible
securities (whether or not then exercisable), and the number of such additional
shares of Common Stock so issued and the denominator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to the
issuance of such additional shares of Common Stock, the number of shares of
Common Stock issuable upon the conversion or exercise of options, warrants,
rights or convertible securities (whether or not then exercisable), and the
number of shares of Common Stock which the aggregate consideration for the total
number of such additional shares of Common Stock so issued would purchase at the
Transaction Value Per Share.
The provisions of this Section 7(a)(iii) shall not apply to any issuance
of additional shares of Common Stock for which an adjustment is otherwise
provided under Section 7(a)(i) hereof. No adjustment of the Aggregate Number
shall be made under this Section 7(a)(iii) upon the issuance of any additional
shares of Common Stock which are issued pursuant to (1) the exercise of this
Warrant in whole or in part, (2) the exercise of other subscription or purchase
rights or (3) the exercise of any conversion or exchange rights in any
Convertible Securities, provided that for purposes of clauses (2) or (3) an
adjustment shall previously have been made upon the issuance of such other
rights or upon the issuance of such Convertible Securities (or upon the issuance
of any warrants or other rights therefor) pursuant to Section 7(a)(iv) or (v)
hereof.
(iv) Warrants and Options. If at any time or from time to time
the Company shall effect a distribution of, or shall in any manner (whether
directly, by assumption in a merger in which the Company is the surviving
corporation and in which the shareholders of the Company immediately prior to
the merger continue to own more than fifty percent (50%) of the Outstanding
Common Stock immediately after the merger and for a period of one hundred eighty
(180) days thereafter, or otherwise) issue or sell any warrants, options or
other rights to subscribe for or purchase (A) any shares of Common Stock or (B)
any Convertible Securities, whether or not the rights to subscribe, purchase,
exchange or convert thereunder are immediately exercisable, and the
consideration per share for which additional shares of Common Stock may at any
time thereafter be issuable pursuant to such warrants, options or other rights
or pursuant to the terms of such Convertible Securities shall be less than the
Transaction Value Per Share (determined on the date specified below), then the
Aggregate Number shall be adjusted as provided in Section 7(a)(iii) hereof on
the basis that (1) the maximum number of additional shares of Common Stock
issuable pursuant to all such warrants, options or other rights or necessary to
effect the conversion or exchange of all such Convertible Securities shall be
deemed to have been issued as of the date of the determination of the
Transaction Value Per Share as hereinafter provided and (2) the aggregate
<PAGE> 46
consideration for such maximum number of additional shares of Common Stock shall
be deemed to be the minimum consideration received and receivable by the Company
for the issuance of such additional shares of Common Stock pursuant to the terms
of such warrants, options or other rights or such Convertible Securities. For
purposes of this Section 7(a)(iv), the effective date of such adjustment and the
date as of which the Transaction Value Per Share shall be computed shall be the
earliest of (A) the date on which the Company shall take a record of the holders
of its Common Stock for the purpose of entitling them to receive any such
warrants, options or other rights, (B) the date on which the Company shall enter
into a firm contract or commitment for the issuance of such warrants, options or
other rights and (C) the date of actual issuance of such warrants, options or
other rights.
(v) Convertible Securities. If at any time or from time to time
the Company shall effect a distribution of or shall in any manner (whether
directly, by assumption in a merger in which the Company is the surviving
corporation and in which the shareholders of the Company immediately prior to
the merger continue to own more than fifty percent (50%) of the Outstanding
Common Stock immediately after the merger and for a period of one hundred eighty
(180) days thereafter, or otherwise) issue or sell Convertible Securities,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, and the consideration per share for the additional shares of Common
Stock which may at any time thereafter be issuable pursuant to the terms of such
Convertible Securities shall be less than the Transaction Value Per Share
(determined on the date specified below), then the Aggregate Number shall be
adjusted as provided in Section 7(a)(iii) hereof on the basis that (A) the
maximum number of additional shares of Common Stock necessary to effect the
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued as of the date of the determination of the Transaction Value
Per Share as herein provided and (B) the aggregate consideration for such
maximum number of additional shares of Common Stock shall be deemed to be the
minimum consideration received and receivable by the Company for the issuance of
such additional shares of Common Stock pursuant to the terms of such Convertible
Securities. For purposes of this Section 7(a)(v), the effective date of such
adjustment and the date as of which the Transaction Value Per Share shall be
computed shall be the earliest of (1) the date on which the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them to
receive any such Convertible Securities, (2) the date on which the Company shall
enter into a firm contract or commitment for the issuance of such Convertible
Securities and (3) the date of actual issuance of such Convertible Securities.
No adjustment of the Aggregate Number shall be made under this Section
7(a)(v) upon the issuance of any Convertible Securities which are issued
pursuant to the exercise of any warrants, options or other subscription or
purchase rights if an adjustment shall previously have been made or if no such
adjustment shall have been required upon the issuance of such warrants, options
or other rights pursuant to Section 7(a)(iv) hereof.
(vi) Subsequent Adjustments. If at any time after any adjustment
of the Aggregate Number shall have been made pursuant to Section 7(a)(iv) or (v)
hereof on the basis of the issuance of warrants, options or other rights or the
issuance of Convertible Securities, or after any new adjustments of the
Aggregate Number shall have been made pursuant to this Section 7(a)(vi),
<PAGE> 47
(A) such warrants, options or rights or the right of conversion
or exchange in such Convertible Securities shall expire, and a
portion of such warrants, options or rights, or the right of
conversion or exchange in respect of a portion of such Convertible
Securities, as the case may be, shall not have been exercised prior
to such expiration, and/or
(B) in the case of adjustments made pursuant to Section 7(a)(iv)
or (v), the consideration per share for which shares of Common Stock
are issuable pursuant to such warrants, options or rights or the
terms of such Convertible Securities shall be irrevocably increased
solely by virtue of provisions therein contained for an automatic
increase in such consideration per share upon the arrival of a
specified date or the happening of a specified event,
such previous adjustment shall be rescinded and annulled and the additional
shares of Common Stock which were deemed to have been issued by virtue of the
computation made in connection with such adjustment shall no longer be deemed to
have been issued by virtue of such computation. Simultaneously therewith, a
recomputation shall be made of the effect of such warrants, options or rights or
Convertible Securities on the determination of the Aggregate Number, which shall
be made on the basis of:
(1) treating the number of additional shares of Common Stock, if
any, theretofore actually issued or issuable pursuant to the
previous exercise of such warrants, options or rights or such right
of conversion or exchange as having been issued on the date or dates
of such exercise and, in the case of a recomputation of a
calculation originally made pursuant to Section 7(a)(iv) or (v), for
the consideration actually received and receivable therefor, and
(2) in the case of a recomputation of a calculation originally
made pursuant to Section 7(a)(iv) or (v), treating any such
warrants, options or rights or any such Convertible Securities which
then remain outstanding as having been granted or issued immediately
after the time of such irrevocable increase of the consideration per
share for which shares of Common Stock are issuable under such
warrants, options or rights or Convertible Securities;
and, if and to the extent called for by the foregoing provisions of Section
7(a)(vi) on the basis aforesaid, a new adjustment of the Aggregate Number shall
be made, such new adjustment shall supersede the previous adjustment so
rescinded and annulled.
(vii) Miscellaneous. The following provisions shall be applicable
to the making of adjustments of the Aggregate Number provided above in this
Section 7(a):
(A) The sale or other disposition of any issued shares of Common
Stock owned or held by or for the account of the Company or any of
its Subsidiaries shall be deemed an issuance thereof for the
purposes of this Section 7(a).
(B) To the extent that any additional shares of Common Stock or
any Convertible Securities or any warrants, options or other rights
to subscribe for or purchase
<PAGE> 48
any additional shares of Common Stock or any Convertible Securities
(1) are issued solely for cash consideration, the consideration
received by the Company therefor shall be deemed to be the amount of
the cash received by the Company therefor, (2) are offered by the
Company for subscription, the consideration received by the Company
shall be deemed to be the subscription price, or (3) are sold to
underwriters or dealers for public offering, the consideration
received by the Company shall be deemed to be the public offering
price, in any such case excluding any amounts paid or receivable for
accrued interest or accrued dividends. To the extent that such
issuance shall be for a consideration other than cash, or partially
for cash and partially for other consideration, then, except as
otherwise expressly provided herein, the amount of such
consideration shall be deemed to be the fair market value of such
consideration (plus, if applicable, the amount of such cash), at the
time of such issuance, determined in the manner set forth in Section
7(d)(i). In case any additional shares of Common Stock or any
Convertible Securities or any warrants, options or other rights to
subscribe for or purchase such additional shares of Common Stock or
Convertible Securities shall be issued in connection with any merger
in which the Company is the survivor and issues any securities, the
amount of consideration therefor shall be deemed to be the fair
market value of such additional shares of Common Stock, Convertible
Securities, warrants, options or other rights, as the case may be,
determined in the manner set forth in Section 7(d)(i).
The consideration for any shares of Common Stock issuable
pursuant to the terms of any Convertible Securities shall be equal
to (x) the consideration received by the Company for issuing any
warrants, options or other rights to subscribe for or purchase such
Convertible Securities, plus (y) the consideration paid or payable
to the Company in respect of the subscription for or purchase of
such Convertible Securities, plus (z) the consideration, if any,
payable to the Company upon the exercise of the right of conversion
or exchange of such Convertible Securities.
In case of the issuance at any time of any additional shares of
Common Stock or Convertible Securities in payment or satisfaction of
any dividends upon any class of stock other than Common Stock, the
Company shall be deemed to have received for such additional shares
of Common Stock or Convertible Securities a consideration equal to
the amount of such dividend so paid or satisfied.
(C) The adjustments required by the preceding paragraphs of this
Section 7(a) shall be made whenever and as often as any specified
event requiring an adjustment shall occur, except that no adjustment
of the Aggregate Number that would otherwise be required shall be
made (except in the case of a Stock Subdivision or Stock
Combination, as provided for in Section 7(a)(i) hereof) unless and
until such adjustment either by itself or with other adjustments not
previously made adds or subtracts at least one one-hundredth (0.01)
of one share to or from the Aggregate Number immediately prior to
the making of such adjustment. Any adjustment representing a change
of less than such minimum amount (except as aforesaid) shall be
carried forward and made as soon as such adjustment, together with
other adjustments required by this Section 7(a) and not previously
made, would result in a minimum adjustment. For the purpose of any
adjustment, any specified event shall be deemed to have occurred at
the close of business on the date of its occurrence.
<PAGE> 49
(D) In computing adjustments under this Section 7(a), fractional
interests in Common Stock shall be taken into account to the nearest
one-thousandth (0.001) of a share.
(E) If the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend
or distribution or subscription or purchase rights and shall,
thereafter and before the distribution to shareholders thereof,
legally abandon its plan to pay or deliver such dividend,
distribution, subscription or purchase rights, then no adjustment
shall be required by reason of the taking of such record and any
such adjustment previously made in respect thereof shall be
rescinded and annulled.
(b) Changes in Common Stock. In case at any time the Company shall
initiate any transaction or be a party to any transaction (including, without
limitation, a merger, consolidation, share exchange, sale, lease or other
disposition of all or substantially all of the Company's assets, liquidation,
recapitalization or reclassification of the Common Stock) in connection with
which the previous Outstanding Common Stock shall be changed into or exchanged
for different securities of the Company or capital stock or other securities of
another corporation or interests in a non-corporate entity or other property
(including cash) or any combination of the foregoing (each such transaction
being herein called a "Transaction"), then, as a condition of the consummation
of the Transaction, lawful, enforceable and adequate provision shall be made so
that the Holder shall be entitled to elect by written notice to the Company to
receive (i) a new warrant in form and substance similar to, and in exchange for,
this Warrant to purchase all or a portion of such securities or other property
or (ii) upon exercise of this Warrant at any time on or after the consummation
of the Transaction, in lieu of the Warrant Shares issuable upon such exercise
prior to such consummation, the securities or other property (including cash) to
which such Holder would have been entitled upon consummation of the Transaction
if such Holder had exercised this Warrant immediately prior thereto (subject to
adjustments from and after the consummation date as nearly equivalent as
possible to the adjustments provided for in this Section 7). The Company will
not effect any Transaction unless the definitive documentation relating to such
Transaction provides for the assumption prior to the consummation thereof, by
each corporation or other entity (other than the Company) which may be required
to deliver any new warrant, securities or other property as provided herein, of
the obligation to deliver to such Holder such new warrant, securities or other
property in accordance with the foregoing provisions. The foregoing provisions
of this Section 7(b) shall similarly apply to successive Transactions.
(c) Other Action Affecting Common Stock. In case at any time or from
time to time the Company shall take any action of the type contemplated in
Section 7(a) or (b) hereof but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights, in each case to the extent having equity
features), then, unless in the opinion of the Board of Directors such action
will not have a material adverse effect upon the rights of the Holder (taking
into consideration, if necessary, any prior actions which the Board of Directors
deemed not to materially adversely affect the rights of the Holder), the
Aggregate Number shall be adjusted in such manner and at such time as the Board
of Directors of the Company may in good faith determine to be equitable in the
circumstances.
<PAGE> 50
(d) Notices.
(i) Notice of Proposed Actions. In case the Company shall propose
(A) to pay any dividend payable in stock of any class to the holders of its
Common Stock or to make any other distribution to the holders of its Common
Stock, (B) to offer to the holders of its Common Stock rights to subscribe for
or to purchase any Convertible Securities or additional shares of Common Stock
or shares of stock of any class or any other securities, warrants, rights or
options, (C) to effect any reclassification of its Common Stock, (D) to effect
any recapitalization, stock subdivision, stock combination or other capital
reorganization, (E) to effect any consolidation or merger, share exchange, or
sale, lease or other disposition of all or substantially all of its property,
assets or business or (F) to effect the liquidation, dissolution or winding up
of the Company, then in each such case the Company shall give to the Holder
written notice of such proposed action, which shall specify the date on which a
record is to be taken for the purposes of such stock dividend, distribution or
rights, or the date on which such reclassification, reorganization,
consolidation, merger, share exchange, sale, transfer, disposition, liquidation,
dissolution or winding up is to take place and the date of participation therein
by the holders of Common Stock, if any such date is to be fixed, or the date on
which the transfer of Common Stock is to occur, and shall also set forth such
facts with respect thereto as shall be reasonably necessary to indicate the
effect of such action on the Common Stock and on the Aggregate Number after
giving effect to any adjustment which will be required as a result of such
action. Such notice shall be so given in the case of any action covered by
clause (A) or (B) above at least ten (10) days prior to the record date for
determining holders of the Common Stock for purposes of such action and, in the
case of any other such action, at least ten (10) days prior to the earlier of
the date of the taking of such proposed action or the date of participation
therein by the holders of Common Stock.
(ii) Adjustment Notice. Whenever the Aggregate Number is to be
adjusted pursuant to this Section 7, unless otherwise agreed by the Holder, the
Company shall forthwith prepare a certificate which shall set forth, in
reasonable detail, the event requiring the adjustment and the method by which
such adjustment is to be calculated. The certificate shall set forth, if
applicable, a description of the basis on which the Board of Directors
determined, as applicable, the Fair Market Value Per Share, the Closing Date
Value Per Share, the fair market value of any evidences of Indebtedness, shares
of stock, other securities, warrants, other subscription or purchase rights, or
other property or the equitable nature of any adjustment under Section 7(b) or
(c) hereof, the new Aggregate Number and, if applicable, any new securities or
property to which the Holder is entitled. The Company shall promptly cause a
copy of such certificate, signed by the chief financial officer of the Company,
to be delivered to the Holder. In the case of any determination of Fair Market
Value Per Share, such certificate shall be delivered to the Holder within the
time period set forth in the definition of Fair Market Value Per Share and the
Holder may object thereto as provided therein. In the case of any other
determination of fair market value (including the fair market value of any
evidences of indebtedness, shares of stock, other securities, warrants, other
subscription or purchase rights or other property), the Holder may object to the
determination in such certificate by giving written notice within ten (10) days
of the receipt of such certificate and, if the Holder and the Company cannot
agree to the fair market value within ten (10) days of the date of the Holder's
objection, the fair market value shall be determined by a national or regional
investment bank or a national accounting firm mutually selected by the Holder
and the Company, the fees and expenses of which shall be paid fifty percent
(50%) by the Company and fifty percent (50%) by the Holder.
<PAGE> 51
The Company shall keep at its Principal Office copies of all such certificates
and cause the same to be available for inspection at said office during normal
business hours by the Holder or any prospective purchaser of the Warrant (in
whole or in part) if so designated by the Holder.
SECTION 8. No Dilution or Impairment. The Company will not, by amendment
of its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, share exchange,
dissolution or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, including without limitation
the adjustments required under Section 7 hereof, and will at all times in good
faith assist in the carrying out of all such terms and in taking of all such
action as may be necessary or appropriate to protect the rights of the Holder
against dilution or other impairment. Without limiting the generality of the
foregoing and notwithstanding any other provision of this Warrant to the
contrary (including by way of implication), the Company (a) will not increase
the par value of any shares of Class B Common receivable on the exercise of this
Warrant above the amount payable therefor on such exercise, (b) will take all
such action as may be necessary or appropriate so that the Company may validly
and legally issue fully paid and nonassessable shares of Class B Common on the
exercise of this Warrant, (c) will not effect any stock split, stock
combination, recapitalization or other change affecting any class of Common
Stock unless such change is also made with respect to all other classes of
Common Stock, (d) will not pay any dividend or make any other distribution with
respect to any class of Common Stock unless dividends are paid and distributions
are made at the same rate on all classes of Common Stock (and if any such
dividend is a stock dividend, such dividend shall be declared in shares of the
applicable class to the holders of such class) and (e) will not take any other
action intended to treat, or having the effect of treating, any class of Common
Stock in a manner which impairs, or is otherwise different from, any other class
of Common Stock.
SECTION 9. Board Visitation Rights. For so long as the Original Holder
or any of its Affiliates (the "Original Holder Group") beneficially owns at
least 50% of the Aggregate Number (after any reduction or adjustment as provided
herein), or Warrants exercisable therefor, the Company shall (a) permit two
representatives of the Original Holder Group to attend all meetings of the Board
of Directors of the Company, or any committee thereof, (b) provide copies to
such representatives of all materials furnished to the members of the Board of
Directors or any committee thereof, (c) pay all out-of-pocket expenses incurred
by such representatives in connection with their attendance in person at all
such meetings as long as the Original Holder Group beneficially owns any shares
of Series B Preferred and (d) give each such representative designated by the
Original Holder Group at least five (5) Business Days' advance written notice of
any such meeting. One such representative, for so long as the Original Holder
Group holds a majority of the outstanding shares of Series B Preferred, shall be
the director elected by the holders of the Series B Preferred pursuant to the
terms of the Certificate of Incorporation.
<PAGE> 52
SECTION 10. Transfers of the Warrant.
(a) Generally. Subject to the restrictions set forth in Section 1(b) and
this Section 10, the Holder may at any time and from time to time freely
transfer this Warrant and the Warrant Shares in whole or in part. This Warrant
has not been, and the Warrant Shares at the time of their issuance may not be,
registered under the Securities Act of 1933 (the "Securities Act"), and, except
as provided in any separate registration rights agreement, nothing herein
contained shall be deemed to require the Company to so register this Warrant and
the Warrant Shares. This Warrant and the Warrant Shares are issued or issuable
subject to the provisions and conditions contained herein and in the Purchase
Agreement, and every Holder hereof by accepting the same agrees with the Company
to such provisions and conditions, and represents to the Company that this
Warrant has been acquired and the Warrant Shares will be acquired for the
account of the Holder for investment and not with a view to or for sale in
connection with any distribution thereof.
(b) Restrictive Securities Legend. The certificate representing the
shares of Class B Common issued upon the exercise of the Warrant shall bear the
restrictive legend set forth below:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, or the securities laws of any State
and may not be sold or otherwise disposed of except pursuant to an
effective registration statement under such Act and applicable State
securities laws or pursuant to an applicable exemption from the
registration requirements of such Act and such laws."
(c) Certain Transfer Restrictions. At any time prior to the initial
Public Offering, this Warrant and the Warrant Shares may only be transferred, in
whole or in part, to a Person other than a Company Competitor (any such Person,
a "Permitted Transferee") upon ninety (90) days prior written notice to the
Company; provided, that any such Permitted Transferee acquires aggregate
interests in this Warrant and any Warrant Shares for not less than 20% of the
Aggregate Number (as reduced and adjusted from time to time), or (if less) all
of the Aggregate Number held by the transferor; provided further, that in
connection with any such transfer to an Affiliate or successor of the Holder,
the Holder shall be required to give written notice of such transfer to the
Company within ten (10) days after such transfer.
SECTION 11. Option to Put.
(a) Put Rights. Notwithstanding any other provision of this Warrant, the
Required Holders may elect by giving the Company written notice thereof pursuant
to Section 12(a) hereof, from time to time, at any time after the occurrence of
a "Put Event" (as defined in Section 11(b) hereof) and prior to the Expiration
Date, to sell to the Company (at a price established pursuant to Section 12(b)
hereof) this Warrant, the Warrant Shares or any portion thereof (based on the
Aggregate Number then in effect pursuant to Section 2 hereof) and the Company
shall be required to purchase such Warrant, Warrant Shares or portion thereof
(collectively, the "Warrant Securities") in accordance with the terms hereof and
Section 12 hereof.
(b) Put Events. The right of the Required Holders to require the Company
to purchase the Warrant Securities or any portion thereof under Section 11(a)
hereof shall be exercisable at any
<PAGE> 53
time after the fifth (5th) Business Day after the occurrence of any of the
following events or circumstances (each a "Put Event"):
(i) June 30, 2002;
(ii) Any Public Offering;
(iii) Any Change in Control;
(iv) the voluntary sale, conveyance, exchange or transfer to another
Person of all or substantially all of the assets of the Company
or the liquidation, winding up or dissolution of the Company or
any Subsidiary thereof; or
(v) Any Event of Default (as defined in Section 14).
provided, that (A) the Required Holders shall not be entitled to exercise their
rights under Section 11(b)(ii) unless (1) such Public Offering is for the
account of any holder of Common Stock of the Company (in whole or in part) and
(2) the Holders do not participate in such offering on a pro rata basis with all
other holders of Common Stock participating in such offering (unless any such
Holder elects not to so participate) and (B) the Required Holders shall not be
entitled to exercise their rights under Section 11(b)(iii) and (iv) in
connection with, and such rights shall expire upon the consummation of, a
Cash-Out Transaction.
SECTION 12. Manner of Redemption.
(a) Put Notice. The Required Holders shall give notice of exercise (the
"Put Notice") of the option under Section 11 hereof to put the Warrant
Securities to the Company by hand delivery, receipt requested, by nationally
recognized overnight delivery service, or by registered first-class mail,
postage prepaid. Such notice shall be mailed or, in the case of hand delivery or
nationally recognized overnight delivery service, delivered (such date of
mailing or delivery being the Exercise Date") not less than thirty (30) (or in
the case of Section 11(b)(i) not less than forty-five (45)) nor more than sixty
(60) days prior to the date set forth in the notice as the date fixed for
redemption (the "Redemption Date"), to the Company at its Principal Office. All
redemption notices shall set forth the Redemption Date and the Warrant
Securities to be redeemed.
(b) Exercise Notice. Within five (5) Business Days after receipt of a
Put Notice from the Required Holders, the Company shall give written notice of
such exercise (the "Exercise Notice") to each other holder of Warrant Securities
(such other holders being referred to herein collectively as the "Other
Holders"). Each Other Holder will have the right to participate in the
redemption and require the Company to redeem all or any portion of such Other
Holder's Warrant Securities by delivering written notice thereof to the Company
within ten (10) Business Days following receipt of the Exercise Notice. All such
notices delivered by such Other Holders will be deemed to have been delivered as
of the date of the initial Put Notice and taken together will be deemed to be
one exercise of the rights of such Required Holders and Other Holders to put all
or a portion of their Warrant Securities as provided hereunder.
<PAGE> 54
(c) Redemption Price. The purchase price (the "Redemption Price") of the
Warrant Securities or any part thereof to be redeemed by the Company hereunder
shall be calculated (for the purposes of a redemption under this Section 12) as
of the Exercise Date (the "Redemption Price Calculation Date") and shall be
equal to (i) in the case of this Warrant, the product of (A) the difference of
(1) the Fair Market Value Per Share minus (2) the Exercise Price per share then
in effect multiplied by (B) that portion of this Warrant (expressed in Warrant
Shares) to be redeemed and (ii) in the case of any Warrant Shares issued upon
exercise of this Warrant, the product of (A) the Fair Market Value Per Share
multiplied by (B) that number of Warrant Shares to be redeemed.
(d) Closing. On the Redemption Date, the holders of the Warrant
Securities to be redeemed shall surrender such Warrant Securities to the Company
at its Principal Office or such other place as may be set forth in the Put
Notice on tender by the Company of the Redemption Price in cash or other
immediately available funds. Payment of the Redemption Price shall only be out
of Legally Available Funds. In the event any appraisal to be conducted in
connection with the determination of Fair Market Value Per Share has not been
completed five (5) Business Days prior to the Redemption Date, the Redemption
Date shall be postponed until five (5) Business Days after the completion of
such appraisal.
(e) Partial Exercise. If any warrant is redeemed only in part, the
Company shall issue a new warrant or warrants for the remaining portion of the
warrant, which warrant shall be registered in the name of and delivered to the
appropriate holder.
(f) No Restrictive Agreements; Legally Available Funds.
(i) Covenant Not to Impair Put Rights. The Company covenants and
agrees that it shall not, without the prior written consent of the Required
Holders, enter into or agree to become subject to any term, condition, provision
or agreement that would materially impair the Company's ability to perform its
obligations under Sections 11 and 12; provided, that the Company may enter an
agreement that provides rights similar to, but no more advantageous than
(including with respect to each event triggering a put right pursuant to Section
11), the rights granted to the Holder in Section 11 hereof so long as such
rights of the Holder rank pari passu with, or senior to, any such similar rights
granted to any other Person. The Company represents to the Holder that the
Company is not subject to or bound by any term that would materially impair the
Company's ability to perform its obligations under this Section 12 as of the
date hereof.
(ii) Remedial Action. Upon receipt of a Put Notice, if the
Company believes that at the time of the Redemption Date, the Company would not
have sufficient Legally Available Funds to perform its obligations under this
Section 12, then the Company shall promptly use all reasonable efforts to cause
such Legally Available Funds to become available in any manner permitted or
contemplated by the General Corporation Law of the State of Delaware, as
amended, or any comparable provision of any succeeding law. If, notwithstanding
the Company's reasonable efforts pursuant hereto, the Company is unable to
fulfill its obligations under this Section 12 because of insufficient Legally
Available Funds, the Company shall give prompt written notice thereof to each
holder of Warrant Securities specifying in reasonable detail the nature thereof
and the extent, if any, to which the Company would be able to fulfill its
obligations under this Section 12.
<PAGE> 55
(iii) Holder Options. Upon receipt of notice from the Company as
provided in Section 12(f)(ii), the Required Holders may elect pursuant to
written notice given by the Required Holders to the Company: (A) that each
holder's put rights pursuant to the Put Notice shall remain exercised and the
Redemption Date shall be deferred until any of the first five (5) Business Days
after there are sufficient Legally Available Funds to effect such redemption as
selected by the Required Holders; provided, that, as and to the extent that
there are sufficient Legally Available Funds to effect such redemption, the
Company shall promptly make partial payments of the Redemption Price to the
holders of Warrant Securities to be redeemed, in which case there shall be a
series of redemptions, each of which shall take place not more than five (5)
Business Days after there are sufficient Legally Available Funds to effect such
redemption to an extent that would permit such partial payments of the
Redemption Price in increments of not less than Twenty-Five Thousand Dollars
($25,000) ("Partially Available Funds"); or (B) the exercise of the put rights
pursuant to Section 11(a) shall be rescinded in whole or in part at the option
of the Required Holders (with the result that the Required Holders may require
the Company to redeem the Warrant Securities at any time thereafter until the
later of (1) the Expiration Date or (2) eighteen (18) months after the date the
Required Holders give notice to rescind the exercise of such put rights).
(g) Limit on Grant of Other Put or Redemption Rights. The Company
covenants and agrees that from the date hereof, so long as the Holder holds this
Warrant or any Warrant Shares in respect of which any put rights provided for in
Sections 11 and 12 have not terminated, the Company shall not grant, directly or
indirectly, to any Person or agree to otherwise become obligated in respect of
any rights to require the Company to purchase or redeem securities of the
Company upon the demand of any Person without the prior written consent of the
Required Holders; provided, that the Company may enter into an agreement that
provides rights similar to, but no more advantageous than (including with
respect to each event triggering a put right pursuant to Section 11), the rights
granted to the Holder in Section 11 hereof so long as such rights of the Holder
rank pari passu with, or senior to, any such similar rights granted to any other
Person. The Company represents and warrants that it has not previously entered
into any agreement granting any such rights to any Person.
SECTION 13. Call Option. On and after June 30, 2003, the Company shall
be entitled to purchase from the holders of Warrant Securities, all or any
portion of the Warrant Securities then outstanding at a purchase price equal to
one hundred ten percent (110%) of the then Redemption Price as calculated
pursuant to Section 12(c); provided, that, in connection with any such purchase,
the Company shall be required to give the Holder a written representation and
warranty that the Company has not then entered into, or commenced any
discussions with any other Person in connection with entering into, any letter
of intent or any agreement with respect to any transaction of the type described
in Section 11(b)(ii), (iii) or (iv) at a value per share of Common Stock greater
than the Fair Market Value Per Share as calculated for purposes of establishing
the Redemption Price. Each holder of Warrant Securities shall be required under
this Section 13 to sell its Warrant Securities, in whole or in part, upon the
delivery to such holder by the Company of written notice evidencing the
Company's desire to purchase such Warrant Securities. Each holder of Warrant
Securities shall deliver its Warrant Securities to the Company, properly
assigned or endorsed, at the closing therefor held within ten (10) Business Days
after the Company's notice against payment made in cash or other immediately
available funds.
<PAGE> 56
SECTION 14. Events of Default and Remedies.
(a) Events of Default. If any of the following events (an "Event of
Default") shall occur or be continuing for any reason whatsoever (whether such
occurrence shall be voluntary or involuntary or come about or be in effect by
operation of law or otherwise), the Holder shall be entitled to the remedies set
forth in subsection (b) hereof, in addition to any other rights it may have
under Section 11(b) hereof or otherwise or by law:
(i) Warrant. The failure of the Company to keep and fully and
promptly perform and observe in all material respects any of the terms,
covenants or representations contained or referenced herein within
ninety (90) days from the earlier to occur of (A) written notice from
the Holder specifying what failure has occurred, or requesting that a
specified failure be remedied or (B) an executive officer of the Company
becoming aware of such failure; or
(ii) Purchase Agreement. The failure of the Company to keep and fully
and promptly perform and observe in all material respects any of the
terms or covenants contained or referenced in the Purchase Agreement or
failure of any representation or warranty to be true in all material
respects when made or deemed made, in either case, within ninety (90)
days from the earlier to occur of (A) written notice from the Holder
specifying what failure has occurred, or requesting that a specified
failure be remedied or (B) an executive officer of the Company becoming
aware of such failure.
(b) Remedies. On the occurrence of an Event of Default, the Holder may,
at its option, and in addition to all other remedies it may have under Section
11(b) hereof or otherwise or under applicable law, (i) at the Company's expense,
elect to have the Aggregate Number fully and completely recomputed in order to
remove and remedy any prejudice which has been or might have been caused to it
by such Event of Default, including, without limitation, rescinding and
annulling any or all requests for redemption made pursuant to Section 12,
exercises of the Warrant, and waivers or agreements made subsequent to such
Event of Default; and (ii) bring any action for injunctive relief or specific
performance of any term or covenant contained herein or in the Purchase
Agreement, the Company hereby acknowledging that an action for money damages may
not be adequate to protect the interests of the Holder hereunder.
SECTION 15. Definitions. As used herein, in addition to the terms
defined elsewhere herein, the following terms shall have the following meanings.
Capitalized terms not appearing below and not otherwise defined herein shall
have the meaning ascribed to them in the Purchase Agreement.
"Affiliate" means, with respect to a Person, any other Person which
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such Person and, if such Person
is an individual, any member of the immediate family (including parents, spouse
and children) of such individual, any trust whose principal beneficiary is such
individual or one or more members of such individual's immediate family and any
Person who is controlled by any such member or trust. The term "control" means
(a) the power to vote five percent (5%) or more of the securities or other
equity interests of a Person having ordinary voting
<PAGE> 57
power, or (b) the possession, directly or indirectly, of any other power to
direct or cause the direction of the management and policies of a Person,
whether through ownership of voting securities, by contract or otherwise;
provided, that (i) for purposes of Sections 9 and 10(c) hereof, the reference in
clause (a) above to "five percent (5%)" shall be deemed to be "fifty percent
(50%)" and (ii) for purposes of the definition of "Cash-Out Transaction," each
New PC (as defined in the Purchase Agreement without regard to any percentage of
revenues of the Company for which such New PC is responsible) shall be deemed to
be an Affiliate of the Company.
"Business Day" means any day other than a Saturday, Sunday or a day on
which commercial banking institutions in Charlotte, North Carolina are
authorized or required by law or executive order to be closed.
"Cash-Out Transaction" means (a) any Change in Control in which (i) all
of the holders of Common Stock are offered the right to sell or otherwise
transfer all of their shares of Common Stock to a Person or Persons which are
not an Affiliate of the Company (the "Offeror"), (ii) each Holder may elect to
sell or otherwise transfer all of its Warrant Securities for cash or readily
marketable securities in payment for its Warrant Securities, (iii) all of the
holders of Common Stock are offered the same per share consideration and there
is no consideration (other than customary employment arrangements on market
terms) payable to holders of Common Stock other than for their shares of Common
Stock, and (iv) at least eighty percent (80%) of the shares of Common Stock on a
Fully Diluted basis (calculated without regard to the Warrant Securities) are
actually sold or otherwise transferred to the Offeror or (b) any voluntary sale,
conveyance, exchange or transfer to any Person or Persons which are not an
Affiliate of the Company of all or substantially all of the assets of the
Company for cash or readily marketable securities followed promptly (but in any
event within ninety (90) days) thereafter by the liquidation of the Company and
the distribution of the assets of the Company (after payment of all liabilities
and amounts payable to holders of Preferred Stock (as defined in the Certificate
of Incorporation)) to the holders of the Common Stock, pro rata, based on the
shares of Common Stock held by each such holder. No Holder shall be required in
connection with any Cash Out Transaction to incur any liability, contingent or
otherwise, to any transferee of its Warrant Securities for any representations
and warranties concerning the Company or any of its assets or business or for
any amount in excess of the amount received by such Holder in any such
Transaction.
"Certificate of Incorporation" means the Certificate of Incorporation of
the Company, as amended and in effect on the date hereof including the
Certificate of Designation for the Series B Preferred.
"Change in Control" means any event or circumstance upon which any
Person or group (as such term is used for purposes of Section 13 of the Exchange
Act) of Persons, directly or indirectly and in one transaction or a series of
transactions (whether pursuant to share acquisition or exchange, merger,
reorganization, recapitalization or similar transaction), acquires (a) more than
fifty percent (50%) of the voting securities of the Company, determined on a
Fully Diluted basis, or (b) securities or other rights (except to a revocable
proxy for a specific meeting) sufficient to permit such Person or group to elect
a majority of the members of the Board of Directors of the Company.
<PAGE> 58
"Class A Common" means the Class A Common Stock, par value $.01 per
share, of the Company as described in the Certificate of Incorporation.
"Class B Common" means the Class B Common Stock, par value $.01 per
share, of the Company as described in the Certificate of Incorporation.
"Closing Date Value Per Share" means $8.00 per share of Common Stock,
subject to any adjustment required under Section 9.10(c) of the Purchase
Agreement, and further subject to equitable adjustment from time to time for any
combinations, consolidations, stock distributions or stock dividends with
respect to shares of the Common Stock.
"Commission" means the Securities and Exchange Commission or any similar
agency then having jurisdiction to enforce the Securities Act or the Exchange
Act.
"Common Stock" means (a) the Class A Common, (b) the Class B Common, (c)
any other class of capital stock hereafter authorized having the right to share
in distributions either of earnings or assets without limit as to amount or
percentage or (d) any other capital stock into which such Common Stock is
reclassified or reconstituted.
"Company Competitor" means (a) any Person that directly provides
management services to medical group practices similar to those services then
provided by the Company and (b) any Person who owns, directly or indirectly, 50%
or more of the outstanding voting securities of any Person described in clause
(a); provided, that no Person shall be a Company Competitor for purposes of this
Warrant solely by reason of its beneficial ownership of securities for
investment purposes (including securities held by a venture firm or other
portfolio investor).
"Convertible Securities" means evidences of Indebtedness, shares of
stock or other securities which are directly or indirectly convertible or
exchangeable, with or without payment of additional consideration in cash or
property, for shares of Common Stock, either immediately or upon the onset of a
specified date or the happening of a specified event.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission thereunder.
"Expiration Date" means the earlier of (a) June 30, 2007 or (b) the
fifth anniversary of the Company's initial Qualified Public Offering.
"Fair Market Value Per Share" means as of a particular date (a) the
Market Price Per Share or (b) if the Market Price Per Share is not available,
(i) the fair market value of the Outstanding Common Stock based upon an arm's
length sale of the Company on such date (including its ownership interest in all
Persons) as an entirety, such sale being between a willing buyer and a willing
seller and determined without reference to any discount for minority interest,
restrictions on transfer, disparate voting rights among classes of capital stock
or lack of marketability with respect to capital stock divided by (ii) the
aggregate number of shares of Outstanding Common Stock. If the Market Price Per
Share is not available, the Fair Market Value Per Share shall be determined
<PAGE> 59
initially by the Company within ten (10) days of any event for which such
determination is required and such determination (including the basis therefor)
shall be promptly provided to the Holder. Such determination shall be binding on
the Holder unless the Holder objects thereto in writing within ten (10) days of
receipt. In the event the Company and the Holder cannot agree on the Fair Market
Value Per Share within ten (10) days of the date of the Holder's objection, the
Fair Market Value Per Share shall be determined by a disinterested appraiser
(which may be a national or regional investment bank or national accounting
firm) mutually selected by the Company and the Holder, the fees and expenses of
which shall be paid fifty percent (50%) by the Company and fifty percent (50%)
by the Holder. Any selection of a disinterested appraiser shall be made in good
faith within seven (7) days after the end of the last ten (10) day period
referred to above and any determination of Fair Market Value Per Share by a
disinterested appraiser shall be made within thirty (30) days of the date of
selection.
"Fully Diluted" means, with respect to the Common Stock, as of a
particular time the total outstanding shares of Common Stock as of such time,
determined by treating all outstanding options, warrants and other rights for
the purchase or other acquisition of Common Stock as having been exercised and
by treating all outstanding securities of the Company which are convertible into
shares of Common Stock as having been so converted.
"Legally Available Funds" means, with respect to any redemption of the
Warrant Securities hereunder, the amount of funds of the Company legally
available for such redemption as required under Sections 151 and 160 of the
General Corporation Law of the State of Delaware, as amended, or any comparable
provision of any succeeding law.
"Market Price Per Share" means the last reported sales price regular
way, or in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices regular way, in either case of a share
of Common Stock on the New York Stock Exchange or, if such Common Stock is not
listed or admitted to trading on such exchange, on the principal national
securities exchange on which such Common Stock is listed or admitted to trading
or, if not listed or admitted to trading on any national securities exchange, on
the National Association of Securities Dealers Automated Quotations National
Market System or, if such security is not listed or admitted to trading on any
national securities exchange or quoted on such National Market System, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by any two New York Stock Exchange member firms selected from time to
time by the Company for that purpose.
"Original Holder" means First Union Capital Partners, Inc.
"Outstanding Common Stock" of the Company means, as of the date of
determination, the sum (without duplication) of the following: (a) the number of
shares of Common Stock then outstanding at the date of determination, (b) the
number of shares of Common Stock then issuable upon the exercise of the Warrant
(as such number of shares may be adjusted pursuant to the terms hereof) and (c)
the number of shares of Common Stock then issuable upon the exercise or
conversion of Convertible Securities and any warrants, options or other rights
to subscribe for or purchase Common Stock or Convertible Securities (but
excluding any options and securities not then vested and exercisable for or
convertible into Common Stock).
<PAGE> 60
"Person" means any individual, firm, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof, or other entity of any kind and includes any successor (by merger or
otherwise) of such entity.
"Principal Office" means the Company's principal office as set forth in
Section 19 hereof or such other principal office of the Company in the United
States of America the address of which first shall have been set forth in a
notice to the Holder.
"Public Offering" means the offering and sale of Common Stock of the
Company pursuant to an effective registration statement under the Securities
Act.
"Purchase Agreement" means the Preferred Stock and Warrant Purchase
Agreement of even date between the Company and the Original Holder, as amended
or supplemented from time to time.
"Qualified Public Offering" means a firm commitment Public Offering
underwritten by a securities firm of nationally recognized standing with net
proceeds to the Company of at least $25,000,000.
"Qualified Redemption" is defined in Section 2.
"Required Holders" means the holders of at least fifty-one percent (51%)
of the Warrant Securities then outstanding determined on a Fully Diluted basis.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder.
"Series B Preferred" means the Series B Cumulative Redeemable Preferred
Stock of the Company as described in the Certificate of Incorporation.
"Stock Option Plans" means (i) the Company's 1996 Employee Stock Option
Plan, (ii) the Company's 1996 Stock Option Plan for Nonemployee Directors and
(iii) the Company's 1996 Stock Option Plan for Nonemployee Providers and (iv)
any other plan, agreement or award adopted following the date hereof by the
Board of Directors of the Company.
"Subsidiary" means, as to a Person, any corporation, partnership or
other entity of which more than 50% of the outstanding capital stock or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other managers of such corporation, partnership or other
entity is at the time, directly or indirectly, owned by or otherwise controlled
by such Person.
"Warrant Securities" is defined in Section 11(a).
<PAGE> 61
"Warrant Shares" means (a) the shares of Class B Common issued or
issuable upon exercise of this Warrant in accordance with its terms and (b) all
other shares of the Company's capital stock issued with respect to such shares
by way of stock dividend, stock split or other reclassification or in connection
with any merger, consolidation, recapitalization or other reorganization
affecting the Company's capital stock.
SECTION 16. Survival of Provisions. Notwithstanding the full exercise by
the Holder of its rights to purchase Class B Common hereunder, the provisions of
this Warrant shall survive such exercise and the Expiration Date until such time
as the rights of the Required Holders to have the Company redeem all Warrant
Securities held by the Holder have expired or been fully exercised.
SECTION 17. Delays, Omissions and Indulgences. It is agreed that no
delay or omission to exercise any right, power or remedy accruing to the Holder
upon any breach or default of the Company under this Warrant shall impair any
such right, power or remedy, nor shall it be construed to be a waiver of any
such breach or default, or any acquiescence therein, or of or in any similar
breach or default thereafter occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore
or thereafter occurring. It is further agreed that any waiver, permit, consent
or approval of any kind or character on the Holder's part of any breach or
default under this Warrant, or any waiver on the Holder's part of any provisions
or conditions of this Warrant must be in writing and that all remedies, either
under this Warrant, or by law or otherwise afforded to the Holder, shall be
cumulative and not alternative.
SECTION 18. Rights of Transferees. The rights granted to the Holder
hereunder of this Warrant shall pass to and inure to the benefit of all
subsequent transferees of all or any portion of the Warrant (provided that the
Holder and any transferee shall hold such rights in proportion to their
respective ownership of the Warrant and Warrant Shares) until extinguished
pursuant to the terms hereof.
SECTION 19. Captions. The titles and captions of the Sections and other
provisions of this Warrant are for convenience of reference only and are not to
be considered in construing this Warrant.
SECTION 20. Notices. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, telecopy,
overnight courier service or personal delivery:
(a) if to the Company:
Physician Partners, Inc.
111 SW Columbia Street, Suite 725
Portland, Oregon 97201
Attention: Mr. David M. Goldberg
Telecopy No.: (503) 224-4713
<PAGE> 62
(b) if to the Holder:
First Union Capital Partners, Inc.
One First Union Center, 5th Floor
301 South College Street, NC0732
Charlotte, North Carolina 28288
Attention: Mr. Frederick W. Eubank, II
Mr. D. Neal Morrison
Telecopy No.: (704) 374-6711
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; when delivered by
courier, if delivered by commercial overnight courier service; five Business
Days after being deposited in the mail, postage prepaid, if mailed; and when
receipt is acknowledged, if telecopied.
SECTION 21. Successors and Assigns. This Warrant shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns; provided, that the Company shall have no right to assign its
rights, or to delegate its obligations, hereunder without the prior written
consent of the Holder; provided, further, that a merger by operation of law or
otherwise shall not constitute an assignment hereunder.
SECTION 22. Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof.
SECTION 23. Governing Law. This Warrant is to be construed and enforced
in accordance with and governed by the laws of the State of North Carolina and
without regard to the principles of conflicts of law of such state.
SECTION 24. Entire Agreement. This Warrant and the Purchase Agreement
are intended by the parties as a final expression of their agreement and are
intended to be a complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter contained
herein and therein.
SECTION 25. Rules of Construction. Unless the context otherwise requires
"or" is not exclusive, and references to sections or subsections refer to
sections or subsections of this Warrant. All pronouns and any variations thereof
refer to the masculine, feminine or neuter, singular or plural, as the context
may require.
* * *
<PAGE> 63
IN WITNESS WHEREOF, the Company has caused this Warrant to be issued and
executed in its corporate name by its duly authorized officers and its corporate
seal to be affixed hereto as of the date below written.
DATED: _____________, 1997 PHYSICIAN PARTNERS, INC.
[CORPORATE SEAL] By:_______________________________
David M. Goldberg
President
ATTEST:
By:_________________________________
Tim E. Dupell
Secretary
<PAGE> 64
EXHIBIT A
NOTICE OF EXERCISE
To: Physician Partners, Inc.
111 S.W. Columbia Street, Suite 725
Portland, Oregon 97201
1. The undersigned, pursuant to the provisions of the attached Warrant,
hereby elects to exercise this Warrant with respect to ________ shares (the
"Exercise Shares") of Class B Common Stock (the "Exercise Amount"). Capitalized
terms used but not otherwise defined herein have the meanings ascribed thereto
in the attached Warrant.
2. The undersigned herewith tenders the Warrant and payment for the
Exercise Shares in the following manner (please check type, or types, of payment
and indicate the portion of the Exercise Price to be paid by each type of
payment):
____ Exercise for Cash
____ Cashless Exercise
3. Please issue a certificate or certificates evidencing the Exercise
Shares issuable in respect hereof under the terms of the attached Warrant, as
follows:
(Name of Record Holder/Transferee)
and deliver such certificate or certificates to the following address:
(Address of Record Holder/Transferee)
4. The undersigned hereby confirms that the undersigned understands that
the Exercise Shares have not been registered under the Securities Act of 1933,
as amended (the "Securities Act"), and may not be sold, transferred or otherwise
disposed of unless the Exercise Shares are first registered under the Securities
Act or registration is available. The undersigned hereby agrees that the
undersigned shall make no disposition of any Exercise Shares unless and until
there is an effective registration under the Securities Act and applicable state
securities laws with respect to such Exercise Shares or the undersigned shall
have provided the Company a written opinion of counsel in form and substance
satisfactory to the Company that an exemption from such registration is
available under the Securities Act and such state securities law. The
undersigned acknowledges that any transfer or other disposition of Exercise
Shares in contravention of this paragraph shall be null and void and the Company
shall not be required (a) to transfer on its books any such
<PAGE> 65
Exercise Shares or (b) to treat as the owner of such Exercise Shares or
otherwise to accord voting or dividend rights to any purported transferee with
respect thereto.
5. If the Exercise Amount is less than all of the Exercise Shares
purchasable hereunder, please issue a new warrant representing the remaining
balance of such shares, as follows:
(Name of Record Holder/Transferee)
and deliver such warrant to the following address:
(Address of Record Holder/Transferee)
(Signature)
- -------------------------------
(Date)
<PAGE> 66
EXHIBIT B
FORM OF ASSIGNMENT
(To be executed by the registered holder is such holder
desires to transfer all or a portion of the Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
- -------------------------------------------------------------------------------
(Please print name and address of transferee)
- --------------------------------------------------------------------------------
this Warrant with respect to ____________ Warrant Shares, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint ______________________ ____________ Attorney, to transfer the within
Warrant with respect to __________ Warrant Shares on the books of the
within-named Company, with full power of submission. Transferee shall be subject
to all of the terms and conditions set forth in the Common Stock Purchase
Warrant dated ___________, 1997.
Dated:__________________
Signature:
(Signature must conform in all respects to
name of registered holder as specified on
the face of the Warrant)
NOTICE: See legend on front page as to transfer restrictions to which Transferee
shall be subject in all respects.
<PAGE> 67
REGISTRATION RIGHTS AGREEMENT
between
PHYSICIAN PARTNERS, INC.
and
FIRST UNION CAPITAL PARTNERS, INC.,
Dated as of July 10, 1997
<PAGE> 68
TABLE OF CONTENTS
PAGE NO.
<PAGE> 69
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is dated as of July 10, 1997 (this
"Agreement"), by and between PHYSICIAN PARTNERS, INC., a Delaware corporation
(the "Company") and FIRST UNION CAPITAL PARTNERS, INC., a Virginia corporation
("FUCP").
Statement of Purpose
The Company has entered into a Preferred Stock and Warrant Purchase
Agreement dated as of July 10, 1997 (the "Purchase Agreement") providing for the
purchase of shares of preferred stock and a warrant to purchase common stock
from the Company by FUCP. Upon consummation of the transactions contemplated by
the Purchase Agreement, FUCP will be entitled to exercise the warrant for shares
of common stock of the Company in the manner described therein. In connection
with the transactions contemplated by the Purchase Agreement, the Company has
agreed to provide registration rights with respect to the Registrable Securities
(as hereinafter defined) as set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
SECTION 1. Definitions. For the purposes of this Agreement, in addition
to the terms defined elsewhere in this Agreement, the following terms have the
meanings set forth below:
"Approved Underwriter" shall have the meaning assigned thereto in
Section 3(d) hereof.
"Certificate of Incorporation" means the Amended and Restated
Certificate of Incorporation of the Company as in effect on the date hereof
including the provisions set forth in the Certificate of Designation with
respect to the Series B Preferred Stock.
"Class A Common" means the Class A Common Stock, par value $.01 per
share, of the Company, as described in the Certificate of Incorporation.
"Class B Common" means the Class B Common Stock, par value $.01 per
share, of the Company, as described in the Certificate of Incorporation.
"Commission" means the Securities and Exchange Commission or any similar
agency then having jurisdiction to enforce the Securities Act.
"Common Stock" means the Class A Common, the Class B Common and any
other class of stock designated as Common Stock of the Company in the
Certificate of Incorporation.
"Company Underwriter" shall have the meaning assigned thereto in Section
4 hereof.
<PAGE> 70
"Demand Registration" means a demand registration requested by FUCP
pursuant to Section 3 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Holders' Counsel" shall have the meaning assigned thereto in Section
7(a)(i) hereof.
"Inspector" shall have the meaning assigned thereto in Section
7(a)(viii) hereof.
"NASD" means the National Association of Securities Dealers, Inc.
"Person" means any individual, firm, corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
limited liability company, government (or an agency or political subdivision
thereof) or other entity of any kind, and shall include any successor (by merger
or otherwise) of such entity.
"Public Offering" means a public offering of the Common Stock after the
date hereof pursuant to a registration statement declared effective under the
Securities Act.
"Records" shall have the meaning assigned hereto in Section 7(a)(viii)
hereof.
"Registrable Securities" means (a) all shares of Common Stock acquired
by FUCP or its successors or assigns pursuant to exercise of the Warrant and (b)
any other common equity securities of the Company issued in exchange for, upon a
reclassification of, or in a distribution with respect to, such Common Stock.
"Registration Expenses" shall have the meaning assigned thereto in
Section 8.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Warrant" means the common stock purchase warrant issued by the Company
to FUCP pursuant to the Purchase Agreement.
SECTION 2. Securities Subject to this Agreement.
(a) Registrable Securities. For the purposes of this Agreement,
Registrable Securities will cease to be Registrable Securities when (i) a
registration statement covering such Registrable Securities has been declared
effective under the Securities Act by the Commission and such Registrable
Securities have been disposed of pursuant to such effective registration
statement or (ii) the entire amount of Registrable Securities proposed to be
sold in a single sale or in multiple transactions during a six month period are
or, in the written opinion of counsel reasonably satisfactory to the Company,
may be distributed to the public in such single sale or in multiple
<PAGE> 71
transactions during a six month period pursuant to Rule 144 (or any successor
provision then in force) under the Securities Act.
(b) Holders of Registrable Securities. A Person is deemed to be a holder
of Registrable Securities whenever such Person owns of record Registrable
Securities, or holds an option, warrant or other right to purchase, or a
security currently convertible into, Registrable Securities whether or not such
acquisition or conversion has actually been effected. If the Company receives
conflicting instructions, notices or elections from two or more Persons with
respect to the same Registrable Securities, the Company may act upon the basis
of the instructions, notice or election received from the registered owner of
such Registrable Securities. Registrable Securities issuable upon exercise of an
option, warrant or other right or upon conversion of another security shall be
deemed outstanding for the purposes of this Agreement.
SECTION 3. Demand Registration.
(a) Demand Registration. FUCP may make a written request for
registration of Registrable Securities under the Securities Act, and under the
securities or blue sky laws of any jurisdiction reasonably designated by FUCP,
at any time after the earlier of (i) December 31, 2000 and (ii) six months after
the initial Public Offering by the Company; provided, that (A) subject to
Section 3(c) below, the Company will not be required to effect more than two
registrations at the request of FUCP pursuant to this Section 3(a) and (B) the
Company will not be required to effect such registration within the period
beginning on the filing of a registration statement by the Company covering a
firm commitment underwritten Public Offering of Common Stock to be issued by the
Company and ending on the later of (1) the later of 120 days after the effective
date of such registration statement or, if commenced promptly, the commencement
of a public distribution of Common Stock pursuant to such registration
statement, (2) the expiration of any lock-up period required by the
underwriters, if any, in connection therewith or (3) the abandonment of such
Public Offering; and provided further, that if at the time of a request for
registration, the Board of Directors of the Company determines in good faith, in
the exercise of its fiduciary duty, that it would be detrimental to the Company
to effect such registration at such time, the Company may postpone its
obligation hereunder to effect such registration for a single period not to
exceed six (6) months from the date of such request.
(b) Company Obligation to Register. Each request for a Demand
Registration pursuant to Section 3(a) shall specify the amount of the
Registrable Securities proposed to be sold, the intended method of disposition
thereof and the jurisdictions in which registration is reasonably desired. Upon
a request for a Demand Registration, the Company shall (i) promptly give written
notice of the proposed registration to all other holders of Registrable
Securities and (ii) use all reasonable efforts to effect as quickly as is
reasonably practicable the registration of the Registrable Securities specified
in such request, together with the Registrable Securities of any other holder or
holders joining in such request as are specified in a written request given
within 20 days after receipt of such written notice from the Company. A
registration shall not constitute a Demand Registration until it has become
effective and remains continuously effective for a period of not less than 12
months or such shorter period which will terminate when all Registrable
Securities covered by such
<PAGE> 72
Registration Statement (A) have been sold (but not before the expiration of the
90-day period (or applicable shorter period) referred to in Section 4(3) of the
Securities Act and Rule 174 thereunder, if applicable), or (B) may, in the
opinion of counsel reasonably satisfactory to the Company, be distributed to the
public in a single sale pursuant to Rule 144 (or any successor provision then in
force) under the Securities Act. In any registration initiated as a Demand
Registration, the Company shall pay all Registration Expenses in connection
therewith, whether or not such Demand Registration becomes effective; provided,
that all selling expenses relating to Registrable Securities, 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 Registrable Securities other than FUCP, whose fees and disbursements
of counsel shall be borne by the Company as provided in Section 8(c) hereof,
shall be borne by each holder of Registrable Securities pro rata based on the
total number of Registrable Securities included by each holder in the
Registration Statement.
(c) Underwriting Procedures. If FUCP so elects, the offering of such
Registrable Securities pursuant to such Demand Registration shall be in the form
of a firm commitment underwritten offering and the managing underwriter or
underwriters selected for such offering shall be the Approved Underwriter
selected in accordance with Section 3(d). In such event, if the Approved
Underwriter advises the Company, which advice shall be confirmed in writing,
that in its opinion marketing considerations require a limitation on the number
of securities to be sold, the Company shall include in such registration only
the number of Registrable Securities which, in the good faith opinion of such
Underwriter, can be sold, then the number of Registrable Securities to be
included in such registration shall be reduced in the following manner:
(i) first, all or a portion of the Registrable Securities
requested to be included by the holders of Registrable Securities
(other than FUCP) and the holders of any other securities
included in any such registration, pro rata, based on the total
number of Registrable Securities or other securities included in
the Registration Statement; and
(ii) second, if necessary, all or a portion of the Registrable
Securities requested to be included by FUCP.
(d) Selection of Underwriters. In connection with requesting a Demand
Registration of Registrable Securities pursuant to Section 3(a), the Company may
select and obtain an investment banking firm of national reputation to act as
the managing underwriter of the offering (the "Approved Underwriter"); provided,
that the Approved Underwriter shall, in any case, be acceptable to FUCP in its
reasonable judgment.
SECTION 4. Piggy-Back Registration. If the Company proposes to file a
registration statement under the Securities Act with respect to an offering by
the Company for its own account, or an offering for the account of any
stockholder of the Company or any group of such stockholders (other than a
registration statement on Form S-4 or S-8 or any successor forms or any other
forms not available for registering Registrable Securities for sale to the
public), then the Company shall
<PAGE> 73
give written notice of such proposed filing to each holder of Registrable
Securities at least 30 days before the anticipated filing date, and such notice
shall describe in detail the proposed registration and distribution (including
whether the offering will be underwritten and those jurisdictions where
registration under the securities or blue sky laws is intended) and offer such
holders the opportunity to register the number of Registrable Securities as each
such holder may request. The Company shall use all reasonable efforts, within 10
days of the notice provided for in the preceding sentence, to cause the managing
underwriter or underwriters of a proposed underwritten offering (the "Company
Underwriter") to permit the holders of Registrable Securities who have requested
to participate in the registration for such offering to include such Registrable
Securities in such offering on the same terms and conditions as the securities
of the Company included therein, including execution by such holders of an
underwriting agreement in customary form. Notwithstanding the foregoing, if the
Company Underwriter determines for any reason that it would be advisable to
reduce the number of securities to be sold, then the amount of securities in
excess of the amount to be registered for sale by the Company to be offered for
the account of any holder of Common Stock requesting registration (whether or
not a holder of Registrable Securities) shall be reduced pro rata based on the
total number of securities included by any such holder of Common Stock in such
registration statement, to the extent necessary to reduce the total securities
to be included in the offering to the amount recommended by the Company
Underwriter. The Company shall bear all Registration Expenses in connection with
any registration pursuant to this Section 4; provided, that all selling expenses
relating to Registrable Securities, 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 Registrable
Securities, other than FUCP, whose fees and disbursements of counsel shall be
borne by the Company as provided in Section 8(c) hereof, shall be borne by each
holder of Registrable Securities pro rata based on the total number of
Registrable Securities included in the Registration Statement.
SECTION 5. Form S-3 Registration.
(a) Requests for Registration on Form S-3. The Company shall use its
reasonable good faith efforts to qualify to register securities on Form S-3 (or
any successor to such form). After the Company has qualified for the use of Form
S-3 but in any event no earlier than two (2) years after the initial Public
Offering of the Company, in addition to and not in limitation of the rights
contained in the foregoing provisions of this Agreement, any holder of at least
10% of the Registrable Securities shall have the right to request the
registration of any such Registrable Securities on Form S-3; provided, that if
at the time of a request for registration, the Board of Directors of the Company
determines in good faith, in the exercise of its fiduciary duty, that it would
be detrimental to the Company to effect such registration at such time, the
Company may postpone its obligation hereunder to effect such registration for a
single period not to exceed six (6) months from the date of such request. All
such requests shall be in writing and shall state the number of shares of
Registrable Securities to be disposed of and the intended methods of disposition
of such shares by such holder or holders; provided, that the Company shall not
be required to effect a registration pursuant to this Section 5(a) unless (i)
the holders of Registrable Securities requesting registration propose to dispose
of shares of Registrable Securities having an aggregate price to the public
(before deducting underwriting discounts and expenses of sale) of at least
$4,000,000 and (ii)
<PAGE> 74
the number of shares to be so registered for all such holders constitute at
least 33 1/3% of the outstanding Registrable Securities at such date. In case
the Company shall receive from a holder of Registrable Securities a written
request that the Company effect a registration on Form S-3 pursuant to this
Section 5(a), the Company shall (i) promptly give written notice of the proposed
registration to all other holders of Registrable Securities and (ii) use its
reasonable good faith efforts to effect as quickly as is reasonably practicable
the registration of the Registrable Securities specified in such request,
together with the Registrable Securities of any other holder or holders joining
in such request as are specified in a written request given within 20 days after
receipt of such written notice from the Company. Registrations effected pursuant
to this Section 5 shall not be counted as a Demand Registration for purposes of
Section 3.
(b) Underwriting Procedures. If the holders of a majority of the
Registrable Securities for which registration is requested pursuant to Section
5(a) so elect, the offering of such Registrable Securities shall be in the form
of a firm commitment underwritten offering and the managing underwriter or
underwriters selected for such offering shall be an Approved Underwriter
selected in the same manner as described in Section 3(d). In such event, if the
Approved Underwriter advises the Company, which advice shall be confirmed in
writing, that in its opinion marketing considerations require a limitation on
the number of securities to be sold, then the amount of securities in excess of
the amount which can be so registered shall be reduced pro rata based on the
total number of Registrable Securities included by each holder of Registrable
Securities requested to be registered pursuant to such registration on Form S-3.
SECTION 6. Holdback Agreements.
(a) Restrictions on Public Sale by Holders. In order to participate in a
registration of a Public Offering effected hereby, to the extent not
inconsistent with applicable law, each holder of Registrable Securities agrees
not to effect any public sale or distribution of any Registrable Securities
being registered or of any securities convertible into or exchangeable or
exercisable for such Registrable Securities, including a sale pursuant to Rule
144 under the Securities Act, during the period beginning on the filing of such
registration statement and ending on the later of (i) the later of 120 days
after the effective date of such registration statement or, if commenced
promptly, the commencement of a public distribution of the Common Stock pursuant
to such registration statement, (ii) the expiration of any lock-up period
required by the underwriters, if any, in connection therewith or (iii) the
abandonment of such Public Offering.
(b) Restrictions on Public Sale by the Company. The Company agrees not
to effect any public sale or distribution of any of its securities, or any
securities convertible into or exchangeable or exercisable for such securities
(except pursuant to registrations on Form S-4 or S-8 or any successor to such
forms or any other forms not available for registering capital stock for sale to
the public) during the period beginning on the filing of any registration
statement to effect a Public Offering in which the holders of Registrable
Securities are participating and ending on the later of (i) the later of 120
days after the effective date of such registration statement or, if commenced
promptly, the commencement of a public distribution of the Common Stock pursuant
to such
<PAGE> 75
registration statement, (ii) the expiration of any lock-up period required by
the underwriters, if any, in connection therewith or (iii) the abandonment of
such Public Offering.
SECTION 7. Registration Procedures.
(a) Obligations of the Company. Whenever registration of Registrable
Securities has been requested pursuant to Sections 3, 4 or 5 of this Agreement,
the Company shall use all reasonable efforts to effect the registration and sale
of such Registrable Securities in accordance with the intended method of
distribution thereof as quickly as practicable, and in connection with any such
request, the Company shall, as expeditiously as possible:
(i) prepare and file with the Commission (as promptly as
practicable, but in any event not later than 90 days after receipt of a request
to file a registration statement with respect to Registrable Securities) a
registration statement on any form for which the Company then qualifies or which
counsel for the Company shall deem appropriate and which form shall be available
for the sale of such Registrable Securities in accordance with the intended
method of distribution thereof, and use its reasonable good faith efforts to
cause such registration statement to become effective; provided, that before
filing a registration statement or prospectus or any amendments or supplements
thereto, the Company shall (A) provide counsel selected by the holders of a
majority of the Registrable Securities being registered in such registration
("Holders' Counsel") with an adequate and appropriate opportunity, at such
holders' expense, except for FUCP's pro rata portion of such expense, which
shall be paid by the Company in accordance with Section 8(c) hereof, to
participate in the preparation of such registration statement and each
prospectus included therein (and each amendment or supplement thereto) to be
filed with the Commission, which documents shall be subject to the review of
Holders' Counsel, and (B) notify the Holders' Counsel and each seller of
Registrable Securities of any stop order issued or threatened by the Commission
and take all reasonable action required to prevent the entry of such stop order
or to remove it if entered;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period of not less than 12 months or such shorter period which will terminate
when all Registrable Securities covered by such registration statement have been
sold (but not before the expiration of the 90-day period (or applicable shorter
period) referred to in Section 4(3) of the Securities Act and Rule 174
thereunder, if applicable), and comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such registration
statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such registration statement;
(iii) as soon as reasonably possible, furnish to each seller of
Registrable Securities, prior to filing a registration statement, copies of such
registration statement as it is proposed to be filed, and thereafter such number
of copies of such registration statement, each amendment and supplement thereto
(in each case including all exhibits thereto), the prospectus included in such
registration statement (including each preliminary prospectus) and such other
<PAGE> 76
documents as each such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such seller;
(iv) use all reasonable efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions as any seller of Registrable Securities reasonable requests, and
to continue such qualification in effect in such jurisdictions for as long as is
permissible pursuant to the laws of such jurisdictions, or for as long as any
such seller requests or until all of such Registrable Securities are sold,
whichever is shortest, and do any and all other acts and things which may be
reasonably necessary or advisable to enable any such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller; provided, that the Company shall not be obligated to effect, or take any
action to effect, any such registration or qualification in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration or qualification unless the
Company is already subject to service in such jurisdiction and except as may be
required by the Securities Act or applicable rules or regulations thereunder;
(v) use all reasonable efforts to cause the Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
by virtue of the business and operations of the Company to enable the seller or
sellers of Registrable Securities to consummate the disposition of such
Registrable Securities;
(vi) notify each seller of Registrable Securities at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any event as a
result of which, the prospectus included in such registration statement contains
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made, and the
Company shall promptly prepare a supplement or amendment to such prospectus and
furnish to each seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, after delivery to the
purchasers of such Registrable Securities, such prospectus shall not contain an
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances under which they were made;
(vii) enter into and perform customary agreements (including an
underwriting agreement in customary form with the Approved Underwriter or
Company Underwriter, if any, selected as provided in Sections 3, 4 or 5) and
take such other actions as are reasonably required in order to expedite or
facilitate the disposition of such Registrable Securities;
(viii) make available for inspection by any seller of Registrable
Securities, any managing underwriter participating in any disposition pursuant
to such registration statement, Holders' Counsel and any attorney, accountant or
other agent retained by any such seller or any managing underwriter (each, an
"Inspector" and collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company and its
subsidiaries
<PAGE> 77
(collectively, the "Records") as shall be reasonably necessary to enable them to
exercise their due diligence responsibility, and cause the Company's and its
subsidiaries' officers, directors and employees, and the independent public
accountants of the Company, to supply all information reasonably requested by
any such Inspector in connection with such registration statement. Records that
the Company determines, in good faith, to be confidential and which it notifies
the Inspectors are confidential shall not be disclosed by the Inspectors unless
(A) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in the registration statement or to confirm that no
such misstatement or omission has been made, (B) the release of such Records is
ordered pursuant to a subpoena or other order from a court of competent
jurisdiction, or (C) the information in such Records has been made generally
available to the public or is required to be filed with, or made available as
supplemental information to, the Commission. Each seller of Registrable
Securities agrees that it shall, upon learning that disclosure of such Records
is sought in a court of competent jurisdiction, give notice to the Company and
allow the Company, at the Company's expense, to undertake appropriate action to
prevent disclosure of the Records deemed confidential;
(ix) if such sale is pursuant to an underwritten offering, obtain
a "cold comfort" letter from the Company's independent public accountants in
customary form and covering such matters of the type customarily covered by
"cold comfort" letters as Holders' Counsel or the managing underwriters
reasonably request;
(x) furnish, at the request of any seller of Registrable
Securities on the date such securities are delivered to the underwriters for
sale pursuant to such registration or, if such securities are not being sold
through underwriters, on the date the registration statement with respect to
such securities becomes effective, an opinion, dated such date, of counsel
representing the Company for the purposes of such registration, addressed to the
underwriters, if any, and to the seller making such request, covering such legal
matters with respect to the registration in respect of which such opinion is
being given as such seller or underwriters may reasonably request and are
customarily included in such opinions;
(xi) otherwise use its reasonable good faith efforts to comply
with all applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable but no later than 15
months after the effective date of the registration statement, an earnings
statement covering a period of 12 months beginning after the effective date of
the registration statement, in a manner which satisfies the provisions of
Section 11(a) of the Securities Act;
(xii) cause all such Registrable Securities to be listed on each
securities exchange or approved for quotation on each over-the-counter market on
which similar securities issued by the Company are then listed or quoted;
provided, that the applicable listing requirements are satisfied;
(xiii) keep each seller of Registrable Securities advised in
writing as to the initiation and progress of any registration under Sections 3,
4 or 5 hereunder;
<PAGE> 78
(xiv) provide officers' certificates and other customary closing
documents;
(xv) cooperate with each seller of Registrable Securities and
each underwriter participating in the disposition of such Registrable Securities
and their respective counsel in connection with any filings required to be made
with the NASD; and
(xvi) use all reasonable efforts to take all other steps
necessary to effect the registration of the Registrable Securities contemplated
hereby and cooperate with the holders of such Registrable Securities to
facilitate the disposition of such Registrable Securities pursuant thereto.
(b) Seller Information. The Company shall be entitled to require each
seller of Registrable Securities as to which any registration is being effected
to furnish to the Company such information regarding the distribution of such
securities as the Company may from time to time reasonably request.
(c) Notice to Discontinue. Each holder of Registrable Securities agrees
that, upon receipt of any notice from the Company of the happening of any event
of the kind described in Section 7(a) (vi), such holder shall forthwith
discontinue disposition of Registrable Securities pursuant to the registration
statement covering such Registrable Securities until such holder's receipt of
the copies of the supplemented or amended prospectus contemplated by Section
7(a)(vi) and, if so directed by the Company, such holder shall deliver to the
Company all copies, other than permanent file copies then in such holder's
possession, of the prospectus covering such Registrable Securities which is
current at the time of receipt of such notice. If the Company shall give any
such notice, the Company shall extend the period during which such registration
statement shall be maintained effective pursuant to this Agreement (including
without limitation the period referred to in Section 7(a)(ii)) by the number of
days during the period from and including the date of the giving of such notice
pursuant to Section 7(a)(vi) to and including the date when the holder shall
have received the copies of the supplemented or amended prospectus contemplated
by and meeting the requirements of Section 7(a)(vi).
SECTION 8. Registration Expenses.
(a) The Company shall pay all expenses (other than underwriting
discounts and commissions) arising from or incident to the Company's performance
of, or compliance with, its obligations under this Agreement, including without
limitation, (i) Commission, stock exchange and NASD registration and filing
fees, (ii) all fees and expenses incurred in complying with securities or blue
sky laws (including reasonable fees, charges and disbursements of counsel in
connection with blue sky qualifications of the Registrable Securities), (iii)
all printing, engraving, messenger and delivery expenses, and (iv) the fees,
charges and disbursements of counsel to the Company and of its independent
public accountants and any other accounting and legal fees, charges and expenses
incurred by the Company (including without limitation any fees and expenses in
connection with any "cold comfort" letters and any special audits incident to or
required by any registration or qualification) regardless of whether such
registration statement is declared effective.
<PAGE> 79
(b) The Company will, in any event, pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, the fees and expenses incurred in connection with the listing of the
securities to be registered on each securities exchange on which securities of
the same class are then listed or the qualification for trading of the
securities to be registered in each inter-dealer quotation system in which
securities of the same class are then traded, and rating agency fees.
(c) In connection with each registration requested pursuant to Sections
3 or 4 of this Agreement, the Company will reimburse FUCP for the reasonable
fees and disbursements of its counsel incurred in connection with its
participation in such registration notwithstanding the form of registration
statement employed by the Company.
SECTION 9. Indemnification; Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify, to
the extent permitted by law, each holder of Registrable Securities, its
officers, directors, partners, employees and agents and each Person who controls
(within the meaning of the Securities Act or the Exchange Act) such holder from
and against any and all losses, claims, damages, liabilities and expenses
(including reasonable costs of investigation and, subject to Section 9(c)
hereof, reasonable fees, disbursements and other charges of legal counsel)
arising out of or based upon any untrue, or alleged untrue, statement of a
material fact contained in any registration statement, prospectus or preliminary
prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) or arising out of or based upon any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as the same are caused by or contained in any information furnished in
writing to the Company by such holder expressly for use therein. The Company
shall also indemnify any underwriters of the Registrable Securities, their
officers, directors and employees and each Person who controls such underwriters
(within the meaning of the Securities Act and the Exchange Act) to the same
extent as provided above with respect to the indemnification of the holders of
Registrable Securities.
(b) Indemnification by Holders. In connection with any registration
statement in which a holder of Registrable Securities is participating pursuant
to Sections 3, 4 or 5 hereof, each such holder shall furnish to the Company in
writing such information with respect to such holder as the Company may
reasonably request or as may be required by law for use in connection with any
such registration statement or prospectus and each holder agrees to indemnify,
to the extent permitted by law, the Company, any underwriter retained by the
Company and their respective directors, officers, employees and each Person who
controls the Company or such underwriter (within the meaning of the Securities
Act and the Exchange Act) to the same extent as the foregoing indemnity from the
Company to the holders, but only with respect to any such information furnished
in writing by such holder expressly for use in such registration statement.
Notwithstanding the provisions of this Section 9(b), a holder of Registrable
Securities shall not be required to pay any indemnification
<PAGE> 80
in an amount in excess of the net proceeds received by such holder in the
offering to which such registration statement relates.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder (the "Indemnified Party") agrees to give prompt
written notice to the indemnifying party (the "Indemnifying Party") after the
receipt by the Indemnified Party of any written notice of the commencement of
any action, suit, proceeding or investigation or threat thereof made in writing
for which the Indemnified Party intends to claim indemnification or contribution
pursuant to this Agreement; provided, that the failure so to notify the
Indemnifying Party shall not relieve the Indemnifying Party of any liability
that it may have to the Indemnified Party hereunder, unless (and then solely to
the extent that) the Indemnifying Party is materially prejudiced thereby. If
notice of commencement of any such action is given to the Indemnifying Party as
above provided, the Indemnifying Party shall be entitled to participate in and,
to the extent it may wish, jointly with any other Indemnifying Party similarly
notified, to assume the defense of such action at its own expense, with counsel
chosen by it and satisfactory to such Indemnified Party. The Indemnified Party
shall have the right to employ separate legal counsel in any such action and
participate in the defense thereof, but the fees, disbursements and other
charges of such legal counsel (other than reasonable costs of investigation)
shall be paid by the Indemnified Party unless (i) the Indemnifying Party agrees
to pay the same, (ii) the Indemnifying Party fails to assume the defense of such
action with legal counsel satisfactory to the Indemnified Party in its
reasonable judgment or (iii) the named parties to any such action (including any
impleaded parties) have been advised by such legal counsel that either (A)
representation of such Indemnified Party and the Indemnifying Party by the same
legal counsel would be inappropriate under applicable standards of professional
conduct or (B) there may be one or more legal defenses available to it which are
different from or additional to those available to the Indemnifying Party. In
either of such cases the Indemnifying Party shall not have the right to assume
the defense of such action on behalf of such Indemnified Party. No Indemnifying
Party shall be liable for any settlement entered into without its written
consent, which consent shall not be unreasonably withheld.
(d) Contribution. If the indemnification provided for in this Section 9
from the Indemnifying Party is unavailable to an Indemnified Party hereunder in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party, shall contribute to the amount paid or payable by such Indemnified Party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party and Indemnified Party in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative faults of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact, has been made by, or relates to information supplied by, such Indemnifying
Party or Indemnified Party, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such action. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include, subject
to the limitations set forth in Sections 9(a), 9(b) and
<PAGE> 81
9(c), any fees, charges or expenses (including reasonable fees, disbursements
and other charges of legal counsel) reasonably incurred by such party in
connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 9(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 9(d), a holder of Registrable
Securities shall not be required to contribute any amount in excess of the
amount by which the net proceeds received by such holder in the offering to
which such registration statement relates exceeds the amount of any damages that
such holder has otherwise been required to pay. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person.
(e) Survival. The indemnity and contribution covenants contained in this
Section 9 shall remain operative and in full force and effect regardless of (i)
any investigation made by or on behalf of a holder or any person controlling a
holder, (ii) any sale of any Registrable Securities pursuant to this Agreement
and receipt by the holders of the proceeds thereof, or (iii) any termination of
this Agreement for any reason, including after the initial filing of the
registration statement to which these indemnity and contribution covenants
relate.
SECTION 10. Rules 144 and 144A. The Company covenants that it shall use
all reasonable efforts to duly and timely file any reports required to be filed
by it under the Securities Act and the Exchange Act; and that it shall take such
further action as each holder of Registrable Securities may reasonably request
(including providing any information necessary to comply with Rules 144 and 144A
under the Securities Act), all to the extent required from time to time to
enable such holder to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144 or
Rule 144A under the Securities Act, as such rules may be amended from time to
time, or any similar rules or regulations hereafter adopted by the Commission.
The Company shall, upon the request of any holder of Registrable Securities,
deliver to such holder a written statement as to whether it has complied with
such requirements. Without limiting the foregoing, the Company agrees that:
(a) it will, if required by law, maintain a registration statement
(containing such information and documents as the Commission shall specify) with
respect to the Common Stock under Section 12 of the Exchange Act and will timely
file such information, documents and reports as the Commission may require or
prescribe for companies whose stock has been registered pursuant to said Section
12;
(b) it will, if a registration statement with respect to the Common
Stock under Section 12 is effective, or if required by Section 15(d) of the
Exchange Act, make whatever filings with the Commission or otherwise make
generally available to the public such financial and other information as may be
necessary to enable the holders of Registrable Securities to be permitted to
sell shares of Common Stock pursuant to the provisions of Rule 144 or 144A
promulgated under the Securities Act (or any successor rule or regulation
thereto); and
<PAGE> 82
(c) it will, at any time when any holder of Registrable Securities
desires to make sales of any Registrable Securities in reliance on Rule 144A
under the Securities Act (or any successor rule or regulation), provide such
holder and any prospective purchaser therefrom with the information required by
Rule 144A and otherwise cooperate with the holder in connection with such sale.
The Company represents and warrants that any registration statement or
any information document or report filed with the Commission in connection with
the foregoing or any information so made public shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements contained therein
not misleading. The Company agrees to indemnify and hold harmless (or to the
extent the same is not enforceable, make contribution to) the seller of
Registrable Securities, its partners, officers, directors, employees and agents
and each broker, dealer or underwriter (within the meaning of the Securities
Act) acting for any such seller in connection with any offering or sale by such
seller of Registrable Securities or any person, firm or corporation controlling
(within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act) such seller and any such broker, dealer or underwriter from
and against any and all losses, claims, damages, liabilities or expenses (or
actions in respect thereof) arising out of or resulting from any breach of the
foregoing representation or warranty, all on terms and conditions comparable to
those set forth in Section 9 of this Agreement.
SECTION 11. Limitation on Registration Rights of Others. The Company
represents and warrants as of the date hereof that it has not granted to any
Person the right to request or require the Company to register any securities
issued by the Company, except as set forth in this Agreement and in Article IV,
Section 2(A)(6) of the Certificate of Incorporation. The Company covenants and
agrees that, so long as any Person holds any Registrable Securities in respect
of which any registration rights provided for in Section 3 of this Agreement
remain in effect, the Company will not, directly or indirectly, grant to any
Person or agree to or otherwise become obligated in respect of rights of
registration in the nature or substantially in the nature of those set forth in
Section 3 of this Agreement; provided, the Company may enter into an agreement
that provides rights similar to, but no more advantageous or favorable in any
respect than (including any provision with respect to the earliest time for
demand, underwriters cut-back, lock-up period or any other provision), the
rights granted to FUCP in Section 3 hereof so long as such rights of FUCP rank
pari passu with, or senior to, any such rights granted to any other Person.
<PAGE> 83
SECTION 12. Miscellaneous.
(a) Recapitalizations, Exchanges, Etc. The provisions of this Agreement
shall apply, to the full extent set forth herein with respect to the Registrable
Securities, to any and all shares of capital stock of the Company or any
successor or assign of the Company (whether by merger, consolidation, sale of
assets or otherwise) which may be issued in respect of, in exchange for or in
substitution of, the Registrable Securities and shall be appropriately adjusted
for any stock dividends, splits, reverse splits, combinations, recapitalizations
and the like occurring after the date hereof.
(b) No Inconsistent Agreements. The Company shall not enter into any
agreement with respect to its securities that is inconsistent with the rights
granted to the designated holders of the Registrable Securities in this
Agreement.
(c) Remedies. The holders of the Registrable Securities, in addition to
being entitled to exercise all rights granted by law, including recovery of
damages, shall be entitled to specific performance of their rights under this
Agreement. The Company agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the provisions
of this Agreement and hereby agrees to waive in any action for specific
performance the defense that a remedy at law would be adequate.
(d) Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given
unless the Company has obtained the prior written consent of the holders of at
least a majority of the Registrable Securities.
(e) Notices. All notices, demands and other communications provided for
or permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, telecopy, recognized
overnight courier service or personal delivery:
(a) if to the Company:
Physician Partners, Inc.
111 Southwest Columbia, Suite 725
Portland, Oregon 97201
Attention: David M. Goldberg
Telecopy No.: (503) 224-4713
<PAGE> 84
(b) if to FUCP:
One First Union Center
301 S. College St., 5th Floor
Charlotte, North Carolina 28288-0732
Attention: Frederick W. Eubank, II
D. Neal Morrison
Telecopy: (704) 374-6711
(c) if to any other holder of Registrable Securities: The most
recent address of such holder shown in the Company's
record of securityholders
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; when delivered by
courier, if delivered by commercial overnight courier service; five business
days after being deposited in the mail, postage prepaid, if mailed; and when
receipt is acknowledged if telecopied.
(f) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties and the
registration rights and the other obligations of the Company contained in this
Agreement shall with respect to any Registrable Security be automatically
transferred to any subsequent holder of Registrable Securities (excluding any
person who acquires such securities in a transaction with respect to which a
registration statement under the Securities Act is effective at the time or
pursuant to a sale complying with Rule 144 or Rule 144A under the Securities
Act), and may only be transferred in connection with a transfer of Registrable
Securities made in accordance with the terms set forth in the Warrant.
Notwithstanding any transfer of such rights, all of the obligations of the
Company hereunder shall survive any such transfer and shall continue to inure to
the benefit of all transferees.
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina, without regard to the
principles of conflicts of law of such state.
(j) Severability. If any one or more of the provisions contained herein,
or the application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, it being intended that all
of the
<PAGE> 85
rights and privileges of the holders of Registrable Securities shall be
enforceable to the fullest extent permitted by law.
(k) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein.
This Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
<PAGE> 86
IN WITNESS WHEREOF, the undersigned have caused this Registration Rights
Agreement to be executed and delivered under seal as of the day and year first
above written.
PHYSICIAN PARTNERS, INC.
[CORPORATE SEAL] By:______________________________
David M. Goldberg
President
FIRST UNION CAPITAL PARTNERS, INC.
[CORPORATE SEAL] By:_____________________________
Name:
Title:
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